G20 falters as EU acts to reassure markets on Ireland

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The Group of 20 meeting yesterday (11 November) struggled to agree on meaningful action to rebuild the global economy as the EU tried to calm markets over a crisis that erupted in Ireland, whose bond yields hit record highs reminiscent of the Greek debt debacle.

Despite US President Barack Obama having voiced confidence that leaders would agree on steps for more balanced and sustainable global growth, financial markets grew turbulent as it became clear that Ireland's record cost of borrowing was disrupting the eurozone debt market.

Speaking from the G20 in Seoul, German Chancellor Angela Merkel said this time private investors would also have to bear the cost of any future Greek-style bailout.

"We cannot keep explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks," she said, stressing that this time the interests of the financial world would contradict those of the political world.

At the Seoul summit, European Commission President José Manuel Barroso said the European Union had the tools to help Ireland.

"What is important to know is that we have all the essential instruments in place in the European Union and euro zone to act if necessary, but I am not going to make any speculation," he told reporters.

In the wake of the Greek crisis the EU set up a €750bn bail-out fund with the International Monetary Fund (IMF), which could be used should Ireland become insolvent and unable to repay its creditors.

Yields on Irish debt have increased in the past week or so following a Germany-led EU move to amend the bloc's treaties and forge a new permanent rescue mechanism system for any crisis, like the Greek one that plunged the euro zone into disarray.

Unlike Greece, which was bailed out with funds from the International Monetary Fund and the EU, Ireland has reportedly said that the country does not need to borrow from the bond market at current high rates because it has enough funds to sustain itself until the middle of 2011.

G20 on a difficult path

The G20 summit, billed as a forum where rich nations struggling with the recent global financial crisis could ink a new world order with emerging economic powerhouses like India and China, appeared set to agree on little of substance, as policymakers preferred to avoid damaging rows.

Some fear that conflict – primarily between the United States and China – may threaten global growth.

"The real issue is given that it is a problem, how do we coordinate policy? I don't think you should be too demanding […] because such policy coordination has never been attempted before," Indian chief G20 negotiator Montek Singh Ahluwalia reportedly said.

Struggling to recapture the unity forged in the throes of the global economic crisis two years ago, the G20 club of rich and emerging economies had hoped to use the summit to soothe tensions over foreign exchange rates generated by imbalances between cash-rich exporting nations and debt-burdened importers.

A major irritant in the run-up to the meeting was the US Federal Reserve's $600 billion bond-buying spree to revive the economy. Former Fed Chairman Alan Greenspan stirred that pot, saying the United States was deliberately weakening the dollar.

"The US will never do that," US Treasury Secretary Timothy Geithner shot back a few hours later in an interview with CNBC. "We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy."

Geithner again criticised China's currency policies saying the world's second largest economy risked stoking inflation pressures. China earlier reported that consumer price inflation had hit a 25-month high in October.

Nevertheless, Russia said it was "especially worried by attempts by a number of countries to take unilateral decisions to weaken their currencies" to stimulate growth.

"We believe that such steps lead to nervousness among market players and volatility of main currencies, prompting fears of global currency wars," a source with the Russian delegation said.

Obama, speaking after a meeting with South Korean President Lee Myung-bak, said he was confident leaders would support a programme for promoting balanced growth, building on a agreement reached at a G20 summit in Pittsburgh in 2009.

"I don't think this is a controversial proposition," he said.

An agreement on IMF?

A spokesman for the summit said on Friday that G20 leaders were likely to reach some sort of agreement on resolving trade and currency disputes.

The final leaders' statement is expected to call on the International Monetary Fund to produce what sources called "objective data" to identify when global imbalances pose a threat to economic stability.

But negotiators seem unable to agree which indicators the IMF should measure, let alone what countries should do to reduce global imbalances.

(EURACTIV with press reports from Seoul.)

Positions

"It hasn't been helpful," Irish Prime Minister Brian Cowen said in an interview with the Irish Independent, referring to German Chancellor Angela Merkel's intervention. "What has been said there has had, I think, an unforeseen consequence, perhaps."

"The involvement of the private sector should not be seen as an ex-ante, a priori 'must' when it comes to the resolution of financial crises," Jean-Claude Juncker of Luxembourg, the chairman of the Eurogroup of finance ministers of the 16 eurozone countries, told reporters this week.

European Central Bank President Jean-Claude Trichet, who warned prophetically at the summit of a negative investor reaction, favoured ambiguity about bondholder losses ahead of the event. The IMF has shown, he said, that the moral hazard problems of bailouts can be resolved without insisting on bondholder losses ahead of time.

Background

World leaders are currently engaged in a row over currency imbalances and monetary policies that keep currencies artificially low.

G20 finance ministers sealed an accord branded as "historic" on 24 October to reform the International Monetary Fund.

The grand bargain will see Europe give up two seats on the Fund's Executive Board in return for greater responsibility from emerging economies on currency valuations.

China will overtake traditional powerhouses Germany, France and Britain to become the third most powerful member of the IMF, up from sixth spot now.

Timeline

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