Summary: There has been a loss of faith in the current international financial system which was hit so deeply in the global crisis that the problems have been extended to this day. Accordingly, the suggestions for building a new global order are blowing up over the recent period. The members of the G20 are seeking a solution by not just talking but also pushing hard their policy options to speed up the way to the new equilibrium. Turkey is close to acquiring a stronger power in IMF and therefore having a greater responsibility in the international decision making arena.
Amidst the ongoing concerns over the global economy, the G20 leaders are dealing with a long agenda at their meeting on November 11th and 12th. The differences of views among countries seem to have become more visible after the Fed launched the new quantitative easing program on November 3rd. The emerging market members of the G20 group, including Turkey are expected to voice their concerns about the loose monetary policy of U.S. at the summit. In advance of the G20 meeting, World Bank President Zolleick proposed a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values. We are not sure how seriously his comments are taken, but his thesis has drawn quite a lot of attention. What he is basically suggesting is to include Chinese Yuan to the synthetic currency unit SDR, which is composed of U.S. Dollar, Euro, Yen and Pound. On the other hand, there were two key propositions circulated in the media after the previous G20 meetings. One of them is the U.S. plan that advocates limiting the C/A balance by 4% of GDP. Based on IMF 2010 forecasts, the U.S. and Japan do not violate this rule with their 3.2% deficit and 3.1% surplus, respectively. China is close to the limit, as the country’s surplus is foreseen narrowing to 4.7% this year from 9% in 2008. On the other hand, in addition to the developed Asia such as Taiwan (+10%) and Hong Kong (+8.3%), Germany (6.1%) which is Europe’s engine of growth has excessive surplus. Turkey is also in the group of countries that exceed the suggested border line. Among the BRIC countries, Brazil and India have 2.6% and 3.1% deficit, in the same order, while Russia has 4.7% surplus. Some small countries even face high two-digit external balance ratios, yet they do not play a meaningful role in the global imbalances. Therefore, rather than agreeing on a quantitative target, G20 is likely to focus on the systemically important countries and carry on studies to determine the sustainable levels of C/A balance.
The second hot topic may be the banking regulations. The Financial Stability Board, the global body that implements the G20’s communiqués, is told to be mulling on a list of systemically important bank lists which would be subject to separate regulations. Financial Times claimed two separate systemic bank lists would be created, ‘the first with an estimated 20 global banks whose failure would pose a risk to the international financial system. The second would be a country-by-country list of banks that are systemically important within their home economies, but pose little danger to the world.’ Based on these criteria, Japan and China seem to be exempted given their limited international presence. In due course, the decision on a globally set capital surcharge for systemically important banks, that is in essence the core of arguments, may be delayed. On October 22nd, Deputy Prime Minister Babacan told in an interview with AA news agency that “they should decide about the big banks and start implementing it soon.” His remarks hinted that there are two separate lists being prepared for G20. Therefore, the big and systemically important banks in Turkey will likely take place in the second list. However, it is yet uncertain whether being in that list would be advantageous.
Another important issue for Turkey would be any change in the voting power in International Monetary Fund, a topic to be discussed at G20 summit as well. As in known, the Group of 20 leading economies has reached an agreement on a reform of the IMF’s quota and governing structure on November 5th to give a bigger voice to developing countries. With this reform, G20 agreed to double the IMF’s quotas (SDR476.8). The European countries will give up two of their eight seats on the 24-member board, giving more weight to emerging universe. Turkey, being raised to a quota of 0.98%, i.e. the 20th biggest share in IMF, is claimed to benefit the new structure and to gain one of those seats, based on the recent news flow. In the current mechanism, Turkey is being represented by Belgium.
Prior to the G20 summit, the focus was on especially the Chinese data. The large foreign trade surplus in October, together with strong industrial output that expanded by a rapid 13.1% and the inflation that surged to 4.4%, overshooting the Central bank target at 3% all justified China’s efforts to cool down the economy, such as the increase in policy rate and required reserve ratio. The risks to inflation and the additional quantitative easing in the U.S. seem to be putting China in a difficult position. If the country does not want to cool off the economy, they may eventually let Yuan appreciate in order to mitigate the inflationary pressures. Such a policy action would help reduce the global imbalances at a faster pace. U.S. Treasury Secretary Geithner emphasized this point at G20 summit in Seoul by saying that “China cannot continue to resist upward market pressure on its Yuan currency without facing higher inflation and rising asset prices.” He also said that “If you resist those market forces that are just a reflection of confidence that you're going to see strong growth in China, strong productivity growth in China, if you resist those market forces, that pressure is not going to go away it is just going to end up in higher inflation or higher asset prices and that'll be bad for China," while claiming that “China will be more confident in allowing Yuan rise if competitors’ currencies rise too. “
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