UK Economy

World Bank seeks action to quell economic tensions

WASHINGTON (Reuters) - World Bank President Robert Zoellick on Monday called for policy actions to quell growing tensions over currencies and to shore up confidence in the sputtering global economic recovery.

World Bank Group President Robert Zoellick discusses the political and economic impact of the global economic crisis, and its implications for development and globalization, during a speech in Washington September 28, 2009. REUTERS/Molly Riley

Zoellick said slow growth in advanced economies and the threat of asset bubbles in booming emerging market countries present growing risks that global finance officials, who gather in Washington later this week, need to tackle.

The uneven pattern of world growth has raised concerns about tit-for-tat policy responses as nations seek to protect their trade competitiveness as the U.S. dollar slumps on expectations of a further easing in U.S. monetary policy.

Japan intervened in foreign exchange markets for the first time in six years on September 15 to drive down the yen, as several emerging markets have done with their currencies, prompting Brazil last week to warn of a “currency war.”

“I don’t foresee that we’re moving into an era of global currency wars but there are clearly going to be tensions,” Zoellick told reporters ahead of meetings this week of the World Bank and International Monetary Fund.

“Money is chasing yield. It can’t find those yields in developed economies and this is not only pushing up currency values in developing countries... (but) also pushing up prices in assets with the risk of bubbles in property and some commodities,” he added.

Zoellick said the pace of the global recovery had eased since May and will not be rapid enough to lower unemployment rates, while the bounce-back in world trade had probably come to an end. For now, he said the World Bank did not see a return of the global recession.

“We need pro-growth policies,” he said. “This challenging environment calls for further concrete policy responses.”

The search for better returns has led investors to flock to fast-growing emerging markets.

The Institute of International Finance on Monday revised up its forecasts for private capital flows to emerging markets in 2010 by $116 billion (73.3 billion pounds) to $825 billion, and said it expected them to rise further to $833 billion in 2011. Last year, these flows totalled just $581 billion.

The IIF, which represents over 420 member banks in more than 70 countries, said emerging market nations were concerned their currencies could become “unduly strong” given the low interest rate environment was expected to continue in developed economies for longer than initially thought.

“The near-term danger, however, is that this upward pressure escalates and market adjustment becomes disorderly, causing renewed strains in global financial markets and, possibly, igniting policy tensions and, possibly, protectionist measures between key economies, most obviously, the U.S. and China,” the IIF added.

U.S. Treasury Secretary Timothy Geithner has vowed to enlist other Group of 20 nations to pressure China to let its yuan currency rise more in value against the dollar. The U.S. House of Representatives on Wednesday passed a bill to push China on the yuan; but the Senate has not acted.

The IIF said China should allow its currency to appreciate against the dollar, but it also said the U.S. central bank should evaluate the costs and benefits of a potential further easing in monetary policy from a global perspective, not just a domestic one.

With foreign exchange issues expected to dominate the talks in Washington this week, IIF Managing Director Charles Dallara called on a core group of leading economies to take urgent action to ensure a lasting economic recovery by addressing currency tensions and bolstering waning global coordination.

In particular, he called on the United States, China, Japan and the euro zone to broker agreements on fiscal issues, structural reforms and exchange rate policies to rebalance the global economy.

Dallara said more global coordination was also needed on regulatory issues, where some countries are pushing to go beyond the new standards on bank capital and liquidity as proposed by the Basel Committee on Banking Supervision, which are set to be endorsed by G20 leaders at a summit in November.