Finance Chiefs at IMF Split Over Forces Behind Capital Flows

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  • Posted on April 16, 2011

    Guido Mantega, Brazil’s finance minister. Photographer: Adriano Machado/Bloomberg

    Global finance chiefs split over which policies are most to blame for propelling potentially risky capital flows into emerging markets, with both sides pushing the International Monetary Fund to adjudicate.

    The disagreement marked the second day of the IMF’s semi- annual meetings which drew policy makers from the lender’s 187- nation membership to Washington. U.S. Treasury Secretary Timothy F. Geithner blamed a lack of currency appreciation in developing nations such as China for driving so-called hot money into more open markets, while Brazil Finance Minister Guido Mantega pointed his finger at loose monetary policies in rich nations including the U.S.

    The argument came as nations again sparred over an IMF proposal to endorse a limited use of capital controls to shield economies from such flows before they spur overvalued currencies, inflation and asset bubbles. Group of 20 policy makers ducked the issue yesterday, saying they would keep studying the topic.

    “Capital recipient countries are experiencing both commodity inflation and currency overvaluation related to capital flows,” Mantega said in a statement today to the IMF’s policy-steering committee.

    The World Bank calculated in January that net private capital flows to developing countries expanded 44 percent in 2010 to about $753 billion. While these investments often fuel growth, economies including Brazil and South Korea have recently begun to fret that they risk undermining their economies.

    ‘Primary Trigger’

    By keeping interest rates low, countries such as the U.S. are providing the “primary trigger of many of today’s economic woes,” said Mantega. He defended the use of capital controls as legitimate “measures of self defense.”

    “Domestic political constraints have been too easily invoked by reserve currency issuing countries as a reason for adopting ultra-expansionary monetary policies, but this does not change the fact that these policies generate spillovers that have made life difficult for other countries,” he said.

    The U.S. was also chastised for its budget deficit even as Geithner reiterated President Barack Obama’s plan of this week to cut the cumulative shortfall by $4 trillion within 12 years.

    “Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues with repercussions on confidence and the still fragile financial sector,” Dutch Finance Minister Jan Kees de Jager said. As well as worries over Europe’s finances “debt dynamics in other advanced countries, including the United States, are of concern,” he said.

    Imposed Tax

    With its currency climbing, Brazil has imposed a tax of 6 percent on international bond sales and loans with an average minimum maturity of up to 360 days. It received net inflows of $10.5 billion in foreign currencies from trade and financial investments this month through March 25, compared with $7.4 billion for all of February, according to the central bank.

    People’s Bank of China Deputy Governor Yi Gang suggested the IMF pursue “management” of cross-border capital flows as he reiterated inflation remains his country’s biggest challenge.

    “Great volatility of cross-border massive capital flow brings heightened risks in terms of inflation and asset bubbles,” Yi said. “Loose monetary conditions build up inflationary pressures” in both advanced and emerging market economies, he said.

    ‘Fueling Inflation’

    In his statement, Geithner put the onus on nations that manage their currencies, blaming them for magnifying “capital flows into emerging markets with open capital accounts, heightening upward pressure on exchange rates that are flexible and fueling inflation in economies with managed, undervalued exchange rates.”

    “The IMF has the capacity and responsibility to play a critical role in solving this problem and should do so by significantly strengthening its surveillance,” he said.

    The IMF said in a report this month that nations should use capital controls as a last resort to manage inflows of money that threaten their financial stability. Such barriers should be applied only after countries strengthen their banking systems and adopt economic measures such as building up reserves, tightening fiscal policies and lowering central bank interest rates, it said.

    While he welcomed the IMF’s recognition that capital controls have some use, Mantega rejected its proposal for a code of conduct as failing to account enough for the policies of advanced economies and for constraining the response of those countries suffering from the flows.


    “Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression, and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world, including to countries that are overburdened by the spillover effects of the policies adopted,” he said

    Geithner said the IMF’s initiative marked a “good start” and that the U.S. agrees with guidelines laying out which measures should be used before capital controls. “The Fund could increase capital account coverage in its bilateral and multilateral surveillance,” he said.

    Singapore Finance Minister Tharman Shanmugaratnam, who heads the IMF’s steering committee, said the Fund would work to ensure policy makers understand the consequences of their own actions for other countries.

    ‘Fragile Situation’

    “We’re still in a fragile situation, we have to be very alert and the task of the fund is to enhance its surveillance capability,” he said.

    Chilean central bank president Jose De Gregorio said in his address that while capital controls can work if they help reduce current account deficits and insulate economies against vulnerabilities, “their actual effectiveness in these areas is still a matter of debate” given they can create distortions. The G-20 said yesterday it will continue to study the matter.

    German Finance Minister Wolfgang Schaeuble said the G-20 is making gradual progress on the issue. “We’re making progress,” Schaeuble told reporters. “We’re moving towards each other step by step.”

    To contact the reporters on this story: Simon Kennedy in Washington at; Sandrine Rastello in Washington at

    To contact the editor responsible for this story: Christopher Wellisz at Washington at


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