G 20 Divisions and Tensions

February 26th, 2016 7:00 am | by John Jansen |

Via Bloomberg:

Laid Bare in Shanghai: G-20 Tensions Over How to Spur Growth
2016-02-26 10:33:08.510 GMT

By Enda Curran
(Bloomberg) — Global finance chiefs split over how best to
revive the world economy, risking disappointment for investors
seeking a coordinated campaign.
Differences were laid bare on Friday as central bankers and
finance ministers from the Group of 20 developed and emerging
markets gathered for talks in Shanghai.
Calls for increased government spending to lift demand,
which have emanated from the U.S. and China, ran into opposition
from German Finance Minister Wolfgang Schaeuble, who said using
debt to fund growth just leads to “zombifying” economies. Bank
of England Governor Mark Carney voiced skepticism over negative
interest rates, which have now been adopted in continental
Europe and Japan, and the head of the International Monetary
Fund also warned about diminishing effectiveness of monetary
policies.
While Japan’s finance minister said the G-20 will reaffirm
a pledge to avoid competitive devaluations, the lack of
agreement on fiscal or monetary initiatives from the group risks
disappointing investors who have urged some coordinated action
to address stock declines and weak prospects for growth.
Offering some solace was clear signals from China that the host
nation will implement fiscal and monetary easing.

‘Slim’ Hopes

“The chances of the G-20 agreeing to anything specific, and
us being able to report on more than an eloquent statement on
Monday are extremely slim,” wrote Esther Reichelt, a foreign-
exchange strategist at Commerzbank AG in Frankfurt.
The G-20 meet over dinner Friday, with a communique
expected at the conclusion of sessions on Saturday. Stocks in
Asia rose after Chinese central bank Governor Zhou Xiaochuan
said in Shanghai that his country has room for further monetary
actions if needed. Finance Minister Lou Jiwei said China also
has room to loosen fiscal policy.
It’s critical for the G-20 to use all policy levers
available, U.S. Treasury Secretary Jacob J. Lew told reporters
in Shanghai.

America’s Call

“There’s a shortfall in global demand — it’s something we
think does require focus,” Lew said. “It’s a period when it’s
increasingly important to use all the levers of policy that are
available. And that means fiscal levers as well as monetary
policy and structural reforms.”
There was no such commitment from Germany, which last year
posted its largest budget surplus since reunification in 1990 in
absolute terms. Schaeuble, in remarks at a conference Friday,
said that both fiscal and monetary policies had reached their
limits.
“Talking about further stimulus just distracts from the
real tasks at hand,” the German finance chief said, seeking
instead to focus on structural reforms to strengthen national
growth rates. German officials “do not agree on a G-20 fiscal
stimulus package,” he said.

European Division

Eurogroup chief Jeroen Dijsselbloem, who heads gatherings
of euro area finance ministers, rejected Schaeuble’s assessment,
saying hours afterwards that monetary policy can still do more.
While the BOE’s Carney also said that it’s a “myth” that central
banks are out of monetary-policy ammunition, he warned his
central bank counterparts against engaging in a currency war by
pushing interest rates too low.
“It is critical that stimulus measures are structured to
boost domestic demand, particularly from sectors of the economy
with healthy balance sheets,” Carney said in a speech in
Shanghai Friday. “There are limits to the extent to which
negative rates can achieve this.”
For its part, Japan signaled a desire to avoid
confrontation at the gathering, which occurs less than a month
after the Bank of Japan roiled markets with a surprise move to
adopt negative interest rates. BOJ Governor Haruhiko Kuroda,
speaking to lawmakers in Tokyo before flying to Shanghai, said
there was no pre-set plan for the BOJ to implement further cuts
in rates, and — along with Finance Minister Taro Aso —
highlighted that the G-20 was agreed on avoiding competitive
devaluations.

Currency Language

Lew also said that the G-20 should address “the need to
avoid competitive devaluation. That’s competing in a beggar-thy-
neighbor way to share a pie that’s either frozen or shrinking,
and it doesn’t lead anywhere good.”
As for pro-growth measures, “the most likely outcome could
be commitment by some governments to prop up faltering private
capital spending, especially in commodity and manufacturing
exporters,” strategists led by Valentin Marinov, head of Group-
of-10 currency strategy at Credit Agricole SA’s corporate and
investment-banking unit in London, wrote in a note.
Angel Gurria, secretary general of the Organization for
Economic Cooperation and Development, said in an interview that
“we are advocating the possibility of using fiscal space to go
for selective infrastructure projects” that can strengthen
growth. “We need bolder initiatives now, because of how
sluggish, how mediocre the performance has been.”
New development banks backed by China have been prominent
in backing such initiatives.

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