Europe News

Time for a Global Currency Deal: Financial Institutions

Alan Beattie, Tom Braithwaite and Joshua Chaffin, Financial Times

The world’s leading countries should agree a new currency pact to help rebalance the global economy, a leading association of financial institutions has urged.

The , which represents more than 420 of the world’s leading banks and finance houses, warned on Monday that a lack of such coordinated rebalancing could lead to more protectionism. Charles Dallara, IIF managing director, said: “A core group of the world’s leading economies need to come together and hammer out an understanding.”

Last week, Guido Mantega, Brazil’s finance minister, warned of the dangers of a “currency war” as countries unilaterally intervened to prevent the appreciation of their currencies. The US has been pressing China to allow its exchange rate to rise faster, while several countries including Japan, South Korea, Brazil and Switzerland, have been intervening to hold their currencies down.

Mr Dallara, who as a US official worked on the 1985 Plaza Accord which coordinated international action to strengthen the yen against the dollar, called for a more sophisticated updated version of such an agreement. This should include stronger commitments to medium-term fiscal stringency in the US and structural reform in Europe. “Exchange rate understandings are of little use on their own,” he said.

The institute also released its latest forecasts for net flows of capital to emerging markets, which showed a sharp upwards revision for 2010, with the previous estimate of $709 billion rising to $825 billion. The institute said that ultra-low monetary policy in rich countries was rapidly driving money into emerging markets in search of yield, risking destabilization.

“There is an environment of unilateralism and bilateralism, laced with contributions of isolationism and parochialism,” Mr Dallara said.

On Monday Robert Zoellick, World Bank president, said while a currency war was unlikely, “there are clearly going to be tensions” over the matter.

Releasing its policy statement and forecast ahead of this weekend’s annual meetings of ministers at the and World Bank in Washington, the IIF also urged international policymakers not to “gold plate” the Basel III capital accords. It advised countries to avoid creating a variety of national regulations on capital and competing “resolution” regimes.

Mr Dallara criticized the US for failing to adopt a more multilateral approach when it passed financial regulation reform earlier this year. “There was very little attempt by the US authorities to co-ordinate provisions globally,” he said.