Q: what’s worse than being rescued than the IMF? A: China refusing to rescue you

Poor old Europe: it just goes from bad to worse. Already sore from being brutally sidelined during the Copenhagen summit last year, it now faces this addition of insult to injury:

Greece is wooing China to buy up to €25bn of government bonds, a move that underlines Beijing’s increasing financial power, as Athens struggles to fund soaring public debt. Goldman Sachs, the US investment bank, had been promoting a Greek bond sale to Beijing and the State Administration of Foreign Exchange (Safe), which manages China’s $2,400bn foreign exchange reserves, said people familiar with the issue.

That’s what the FT reported yesterday, and the news immediately set pulses racing in Brussels and Frankfurt.  As Unicredit’s chief economist put it to the FT a day later,

For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme”.

But even worse, China then signalled they probably didn’t want Greece’s ropey debt anyway. Yu Yongding – who’s not only a senior member of the Chinese Academy of Social Sciences but was also a member of the Canadian-run L20 project back in the day (and hence a sort of Chinese government-licensed public intellectual on global affairs) – commented yesterday that,

It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class. Let European governments and the European Central Bank rescue Greece.

Cue predictable carnage as the markets digested this news: stocks immediately fell 4%, according to the WSJ, and bond investors demanded a record spread of 3.70% between Greek 10 year bonds and the benchmark 10 year German bonds. But the events of the past couple of days are also an interesting little microcosm of larger issues, some of which are these. Continue reading

What to make of Gordon Brown’s conversion to the Tobin Tax?

“Very substantial drawbacks.” “Big problems attached to it.” “It is very difficult to advocate a tax that has been, in a sense, rejected by the person who put the proposal forward.”

Just three of the observations that Gordon Brown has made in the past about the Tobin Tax. All the more surprising, then, that the Prime Minister should have come out in favour of it in a surprise speech at this weekend’s G20 Finance Ministers – at least until fierce opposition from Tim Geithner forced the UK to back off. (No mention of the idea in Gordon Brown’s FT op-ed on financial institutions this morning, you’ll notice.)

Now that the dust is settling, two questions stand out. First, why the Damascene conversion? And second, how – if at all – does this alter prospects for implementation of the tax?

Start with the reasons why.  Of course, some argue that Brown’s endorsement of the idea is no more than ‘tough on banks’ political positioning. Fraser Nelson, for instance, sees it as “the desperate vote-seeking move of a Prime Minister who knows he’s going down”. Beating up on the banks may be part of the story, but it doesn’t sound convincing enough on its own: you have to wonder whether anything as nerdy as an international currency transaction tax is really going to resonate with the public at large.

John Hilary, the Executive Director of War on Want – the UK NGO that, more than any other, has led the charge on the Tobin Tax – argues that to understand the move, you have to look further back than FSA head Adair Turner’s advocacy of the idea in August: back, in fact, over the last two years, during which several European governments (in particular Norway and latterly France) have been analysing the Tobin tax in detail.

Two weeks ago, John told me this morning, French Foreign Minister Bernard Kouchner hosted the first meeting of a new Task Force on international financial transactions (terms of reference here), which Financial Secretary to the Treasury Stephen Timms attended for the UK. When John met Stephen Timms after that meeting,  Timms told him that the UK’s previous resistance to the tax had been misplaced – and the UK was now on board.

Now, you might think that Timms’s reversal of long-standing HM Treasury policy was probably the result of prodding from Downing Street, and you’d probably be right.  But that’s not at odds with the proposition that Brown’s reversal is primarily because he’s become persuaded of the idea’s merits and feasibility. After all, Brown has more form on global Marshall Plan ideas than most: whatever reservations people have about his International Finance Facility (and I have a few), you can’t doubt the seriousness of his personal commitment to the idea.

As to the style of the announcement (of which Chris Giles justly observes, “just imagine if Tony Blair had arrived uninvited when Gordon Brown was chairing a G7 finance ministers’ meeting and upstaged the agenda by talking about things that had been kicked into the long grass. Brown would have exploded”): well, since when did Gordon Brown ever unveil radical new global proposals in a consultative way?

Continue reading

On the web: the EU’s global influence, Obama’s leadership, and inside the financial crisis…

– With Czech ratification of the Lisbon Treaty now looking increasingly likely, attention shifts to the implications for the EU’s global influence. Benita Ferrero-Waldner, the current External Relations commissioner, offers some thoughts on the future EU foreign policy setup here. Hugo Brady, meanwhile, identifies some of the qualities needed in a new President of the European Council – “the job appears”, he suggests, “to require its holder to be a walking paradox: charismatic but modest, highly effective but non-intimidating, a consensus builder but also a decision-maker”. Pascal Lamy, he argues, might just fit the bill.

– In the London Review of Books, David Bromwich explores President Obama’s tendency toward the conciliatory gesture and major pronouncement, assessing the consequences for delivering meaningful outcomes. “[H]is pattern has been the grand exordium delivered at centre stage”, Bromwich argues, “followed by months of silence”.  Writing in the WSJ, meanwhile, Bret Stephens offers a critical perspective on the President’s commitment to human rights.

– Elsewhere, Dani Rodrik rails against those raising the spectre of protectionism, suggesting that “the world economy remains as open as it was before the crisis struck” and that the “international trade regime has passed its greatest test since the Great Depression with flying colours”. The Economist, meanwhile, provides an analysis of the falling dollar, while Jean Pisani-Ferry and Adam Posen assess the limitations of the Euro as an alternate global currency.

– Finally, behind the scenes of the financial crisis, and based on in-depth interviews throughout, Todd Purdum chronicles Hank Paulson’s time in office. Reuters has an extract from Andrew Ross Sorkin’s new book offering another take on the former US Treasury Secretary’s actions during the crisis. Daniel Yergin, meanwhile, examines the importance of finding a narrative for the crisis – crucial, he suggests, not only in understanding what happened but also offering a “framework for organising thinking for the future”.

The next reserve currency

Last week’s G8 saw more rumblings of dissatisfaction from China about the US dollar’s continuing role as the world’s reserve currency: State Councillor Dai Bingguo said in a statement to the G8+5 that,

We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies’ exchange rates and promote a diversified and rational international reserve currency system.

This is the latest in a series of such statements from China, building on Wen Jiabao saying he was “worried” about China’s stash of US T-bills in March, central bank governor Zhou Xiaochuan‘s essay on reform of the international monetary system a couple of weeks later, and then China’s $120bn contribution to an Asian emergency currency pool in May – potentially an important step towards an “Asian IMF”.

So if / when the dollar does lose its perch as the world’s reserve currency – something that isn’t likely to happen in the short term, admittedly – then what are the candidates to replace it? Continue reading

The Beijing Consensus

dollar_yuan

Back in March, I flagged up the significance of a proposal from Zhou Xiaochuan, China’s central bank governor, for the dollar to be replaced as the world’s reserve currency with a new, more multilateral system based on Special Drawing Rights – and noted that his proposal harked back explicitly to discussions at the Bretton Woods summit in 1944.

As Ngaire Woods points out over at the GEG blog, this is just one component of a Chinese strategy for pursuing power shift in the international monetary order.  Another is the increasingly emphatic Chinese tone on the need for IMF reform – with Wen Jiabao making clear back in March that much-needed additional Chinese contributions to the IMF would be contingent on more voice for developing countries.

Now, another important plank of their reform drive has been unveiled: a new $120 billion emergency currency pool based on the existing Chiang Mai initiative.  Details according to the WSJ:

The initiative aims to create a network of bilateral currency-swap arrangements among Asean and the three East Asian countries. Asean includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Japan, South Korea and China will provide 80% of the $120 billion currency pool and Asean members the remaining 20%. Japan will contribute $38.4 billion, while China, including Hong Kong, will also offer $38.4 billion. South Korea will provide $19.2 billion. Under terms of the program, smaller Asian economies will be able to borrow larger amounts in proportion to their contributions than the more-developed economies.

As Ngaire observes, proposals in the late 1990s for a new Asian Monetary Fund were publicly torpedoed by the US, but it’s the bilateral swap arrangements that Asian nations started to agree then that have grown into the initiative announced yesterday.  And, she stresses,

It is worth highlighting that while China is politely offering something to the IMF (it announced a contribution of $40 billion), it has just announced an almost equivalent contribution ($38.4 billion) to the Asian pool.

All this creates useful independence from the IMF, she continues:

…the ASEAN+3 countries have created for themselves an alternative to borrowing from the IMF. Their arrangements actually use the IMF as a monitor, but crucially guard control (within the region) over their shared reserves. It has emerged in no small part because countries in the region see the IMF as a useful but American instrument of economic coordination.

More Chinese big ideas

Earlier this week, I did a post on Chinese central bank governor Zhou Xiaochuan’s essay calling for the replacement of the dollar as the world’s reserve currency.  Today’s FT contains another instalment of big picture thinking from China on the global economy – this time from Yu Qiao, an economics professor at Tsingua University’s School of Public Policy and Management.

Like Zhou, Yu is explicit on Chinese worries about the potential erosion of the value of their rather large stash of US dollars – $1,200 billion of T-bills alone.  “Most of Mr Obama’s stimulus spending is devoted to social programmes rather than growth promotion,” he notes, “which may exacerbate America’s over-consumption problem and delay sustainable recovery”.

What’s more, he continues, that could in turn end up doing exactly what Tim Geither was worried about in the wake of Zhou’s essay: an erosion of the dollar’s role as reserve currency.  Here, interestingly, there’s what looks like a signal of preparedness to moderate the position set out in Zhou’s essay. Yu says explicitly that,

No other international monetary system offers a viable alternative. However, we can make the main reserve currency power more accountable by creating an instrument to help manage the global crisis.

Admittedly, Yu is an academic and not a member of the government.  But it’s very hard to imagine that a senior Chinese professor would directly contradict his government’s position, on such an acutely political issue, in a time of such severe risks, in the FT, the day before the G20 summit, without clearance.  At the same time, using this approach avoids losing face for Zhou – and may signal a willingness to talk, rather than a definite climbdown.

So what does Yu propose as an alternative way of safeguarding China’s assets, if not reform of the dollar’s reserve currency role?

Continue reading

Bretton Woods 2: now we’re talking

Just before the Washington G20 summit in November last year, David and I co-wrote a paper entitled A Bretton Woods 2 Worth of the Name.  As the title implied, we were politely sceptical of some of the political rhetoric then flying around, comparing the G20’s discussions about bank capitalisation with the rather more far-reaching discussions held at the Mount Washington Hotel in 1944.

Now, though, things are getting more interesting.  Two days ago, Zhou Xiaochuan – the governor of China’s central bank – quietly published a paper on the People’s Bank of China website, entitled Reform the International Monetary System.  It opened like this:

The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question, i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF?

Later, Zhou continues that:

The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

Now this line of thinking really does take us straight back to Bretton Woods – and in particular to Keynes’s proposal for a new global currency called the bancor, and a new global institution called the International Clearing Union (ICU). Continue reading