G-7 Meeting Pretty Uneventful

April 24, 2009

The meeting of G-7 central bank chiefs and finance ministers in Washington produced no significant new revelations or surprises.  A released statement and comments by attendees after the meeting adopted a tone of guarded hope.  The global economic outlook remains “weak” — severe in Bank of Japan Governor Shirakawa’s personal opinion — and “downside risks persist.”  However, “recent data suggest that the pace of decline in our economies has slowed, and some signs of stabilization are emerging.”  No such optimism was expressed when they met ten weeks ago in Rome.

The statement lists the usual promises.  They will do whatever it takes in providing sufficient macroeconomic support to “accelerate the return to trend growth while preserving long-term fiscal sustainability.”  They will spare no effort in restoring normal functionality to the financial system.  They are beefing up the resources and responsibility of the IMF to on a “case-by-case” basis “support the fiscal needs of countries with solid medium-term fiscal prospects.”  They agreed not to undertake protectionist activities that bar the movement of investment and merchandise trade.

On foreign exchange policy coordination, the statement again only mentions the Chinese Renminbi, which is expected to appreciate in effective terms, that is on a trade-weighted basis.  The language used in discussing FX is identical to that in the February statement, with the exception of one added sentence: “We will work with our international partners to modernize the governance of the international financial institutions in order to enhance their relevance, effectiveness, and legitimacy.”  Considerable discussion in the statement is devoted to regulatory reform to back up commitments made by G-7 leaders at the London summit on April 2nd, but such keeps to generalities, not specifics.

Geithner revealed nothing about the bank stress test results or the status of Chrysler and other U.S. automakers.  He is impressed with the spirit of international cooperation but underscored the imperative of more balanced world growth.  That point, I believe, is the crux of the whole problem.  Countries that have been heavy net savers like China and countries that were net spenders like the United States need to swap roles.

The statement made no mention of a 37.5% rise in oil prices since the group met in February, or about yen’s drops of 8.0% against the euro and 5.4% against the dollar during that interval.

Below is an updated chronology of G-7 statements with a focus on foreign exchange policy.

04/24/09 Washington “Many countries are now playing a major role in the global economy and we welcome their contribution to the collective international effort to promote recovery.  We welcome China’s continued commitment to move … [same text as in prior statement about the Renminbi].” Identical three sentences as Rome statement regarding FX policy cooperation and opposition to excessive volatility and disorderly movements.  A former view that exchange rates should reflect fundamentals remains conspicuously missing from the text. Oil $51.56  EUR 1.324 YEN 97.2
02/14/09 Rome “We reaffirm our shared interest in a strong and stable international financial system.  Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.  We continue to monitor exchange markets closely and cooperate as appropriate.” “…we welcome China’s fiscal measures and continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi in effective terms and help promote more balanced growth in China and the world economy.” Oil $37.51  EUR 1.2867 YEN 91.99
Officials issued a statement of atypical length and specificity that abandoned the usual discussion of economic conditions and prospects and excluded any paragraph on currency market policy.  The communique promised “urgent and exceptional action” to support bank recapitalisation and market liquidity and to promote lending, depositor insurance, and the health of secondary markets for mortgages and securitized assets. In this more coordinated process, officials pledged not to take steps that would harm other economies and endorsed a critical continuing role for the IMF. Oil $79.94  EUR 1.341 YEN 100.3
04//11/08 Washington Replaced two sentences of FX section stating a desire for parities to reflect fundamentals and not show excessive volatility with the following more sharply worded protest:  “We reaffirm our shared interest in a strong and stable international financial system.  Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.”  Wording on the yuan was same as in February.  No explicit mention of the euro, dollar, or yen.   OIL $110.14 EUR 1.583 YEN  100.8
02/09/08 Tokyo Meeting focused upon global slowdown, not forex issues, and policy responses to such.  Effort made to present solidarity but did not unveil immediate actions. Comment on yuan softened by substituting word “encourage” for phrase “stress its need to allow.”  No other changes made to forex policy paragraph.  ECB’s Trichet quelled talk of an ECB near-term rate cut.  Bank of Canada Governor Carney: more easing is likely. OIL $91.77 EUR 1.451 YEN 107.3
10/19/07 Washington No mention of dollar, yen, or euro.  Same first 3 sentences in forex policy paragraph but modified language on yuan to read “We welcome China’s decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate.” OIL $88.60 EUR 1.430 YEN 114.5
04/13/07 Washington Identical exchange rate paragraph used as in the Essen statement, with no explicit mention of yen, yuan, dollar, or euro. Expressed a little more optimism about G7 growth, but co
untry-specific comments were similar to the February communique. Deleted praise for Chinese reforms.
OIL $63.63  EUR 1.353  YEN 119.1
02/10/07 Essen “We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur.” No explicit reference to the yen. Upbeat comments about growth outlook. OIL $59.89 EUR 1.300 YEN 121.8
09/16/06 Singapore Same currency market policy paragraph as used in April 2006. Chinese officials offered no more specific promises on yuan flexibility timetable. In later remarks, European officials said the yen should appreciate. More moderate U.S. growth was predicted, but the global outlook was called positive. OIL $63.40 EUR 1.265 YEN 117.5
04/21/06 Washington Same first 3 sentences in paragraph dealing with FX. Then, “Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur.”  Made recommendations for a shared attack on global imbalances.  Called expansion outlook favorable and inflation contained. OIL $75.17 EUR 1.234 YEN 116.6
12/03/05 London Kept standard 3-sentence expression of FX policy. Changed yuan comment to “we expect that further flexible implementation of China’s currency system would improve the functioning and stability of the global economy and the international monetary system.” Upgraded growth outlook to “solid” but broadened risk from oil to “possibility of increasing inflationary pressures.” OIL $59.32 EUR 1.172 YEN 120.5
09/23/05 Washington First 3 sentences of FX paragraph are the same.  Welcomed Beijing decision to pursue greater flexibility in FX regime and “expects the development of this more market-oriented system…” Global economy continues to expand, but future risks have increased and become more numerous. Such include higher energy prices, growing global imbalances, and protectionism. OIL $64.19 EUR 1.292 YEN 107.8
04/16/05 Washington Fifth consecutive G7 statement to invoke same 4-sentence FX paragraph adopted initially in February 2004. Trichet said the call for FX flexibility meant for all “emerging Asian nations with restrictive FX policies,” not just China. The Chinese did not attend. OIL $50.49 EURO 1.292 YEN 107.8
02/05/05 London No change in FX paragraph. The head of the People’s Bank of China denied any timetable for a yuan revaluation. G7 claimed global growth is more moderate than in prior October but is “expected to remain robust for 2005. “Inflation “remains subdued.” U.S. committed to fiscal consolidation, Europe and Japan to further structural reform. OIL $46.48 EUR 1.287 YEN 104.1
10/01/04 Washington Same FX paragraph for a third straight time.  “Oil prices remain high and are a risk. So first we call on oil producers to provide adequate supplies to ensure that prices moderate. Second, it is important for consumers and producers that oil markets function efficiently, and we encourage the IEA to enhance its work on oil data transparency.” OIL $50.12 EUR 1.240 YEN 110.5
04/24/04 Washington Identical 4-sentence paragraph on FX policy to that in the Boca Raton G7 statement. FX should reflect fundamentals. Excessive FX volatility and disorder are undesirable. G7 to cooperate on FX. Urged flexible FX regimes where lacking. OIL $36.46 EUR 1.830 YEN 109.1
02/07/04  Boca Raton No deletions but two inserts made to clarify what some felt was a market “misinterpreta-tion” of Dubai’s message on FX policy. Added the following after Dubai’s first sentence: “excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” Final sentence now reads “…areas that lack such flexibility in FX rates to promote…” OIL $32.48 EUR 1.270 YEN 105.5
09/20/03 Dubai “Exchange rates should reflect fundamentals. We continue to monitor exchange rates closely and cooperate as appropriate in this context. We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.” OIL $27.03 EUR 1.137 YEN 114.0
04/12/03 Washington “Growth in most of our economies has been subdued, though uncertainties have diminished…We will respond as needed to developments in the economic environment. We will contin
ue to monitor exchange markets closely and cooperate as appropriate.” No specific currency misalignments or policies were mentioned.
OIL $28.00 EUR 1.075 YEN 120.5
02/22/03  Paris While affirming confidence in the underlying strength of their economies, officials, “recognize the imperative for higher growth rates and resolve to take steps to achieve this result.” ECB president Duisenberg hinted a near-term rate cut may be in the works, but the statement’s policy commitments were broad and unlikely to impress traders. Language used on Forex was standard stuff. OIL $35.58 EUR 1.077 YEN 118.7
09/27/02 Washington Aside from a pledge “to monitor exchange markets closely and cooperate as appropriate,” statement did not comment on recent countries. “Economic growth is continuing, though at a more moderate pace than earlier this year. Risks remain.” OIL $30.45 EUR 0.981 YEN 122.6
04/20/02 Washington Fifth straight statement to avoid discussion of specific currencies and to merely include standard language about monitoring markets and cooperating as appropriate… “Each of us has an ongoing responsibility to implement sound macroeconomic policies and structural reforms to sustain recovery.” OIL $26.40 EUR 0.892 YEN 130.3
02/09/02  Ottawa Standard clause about monitoring forex and cooperating as appropriate but no further remarks about any particular currency. “Prospects have generally strengthened for resumed expansion… We remain vigilant and will each continue to take appropriate steps to promote a sustained recovery.” Discussed Argentina and Enron. U.S. Treasury Secretary O’neill said the G7 was satisfied with Japan’s progress. OIL $35.58 EUR 0.872 YEN 134.7
10/06/01 Washington Meeting less than one month after the 9/11 attacks, no currencies were cited. “We will continue to monitor exchange markets closely and cooperate as appropriate.” O’neill “understands” why BOJ intervened heavily in September. G7 determined to “bring forward measures to increase economic growth and preserve the health of our financial markets.” OIL $ 29.60 EUR 0.918 YEN 120.5



2 Responses to “G-7 Meeting Pretty Uneventful”

  1. Plutarch says:

    Hi there – interesting blog
    would like to know what your thoughts are about the Chinese Renminbi joining the whole global system of finance – its still a closed currency isnt it – what will be the effects when this currency is able to be traded freely – http://www.makepolicy.com

  2. larrygreenberg says:

    Thanks for the compliment about my blog, and please tell your friends and colleagues about it. You are correct that the Renminbi does not float freely but rather is controlled by Beijing officials. I would not want to speculate on when they allow its value to be determined by market forces. It’s a political decision. Many neighboring Asian economies, which had current account deficits and relied upon capital inflows to spur investment and overall economic development, suffered deeply in the late 1990’s Asian crisis, something the Chinese leadership is determined not to permit. An undervalued Renminbi and other policies create more than enough capital for internal investment and plenty more to be invested abroad. The Renminbi was fixed at 8.277 per dollar from the mid-1990’s until July 2005, revalued 2.1% at that time and allowed to appreciate in a gradual way thereafter to around 6.83/$ in mid-2008. Since then, it has been held steady against the dollar, as both currencies advanced against most other major currencies. Since the Renminbi went up in trade-weighted terms, China was not declared a currency manipulator by the U.S. Treasury. How the Renminbi trades when it eventually is allowed to reflect market forces will depend on when that decision is made and the economic backdrop at the time. It could go up or down against the dollar depending on the circumstances.