Friday, November 12, 2010

G20: Victory for Emerging Countries, Green Light to Control Currencies

The G-20 gave the green light to emerging economies to adopt capital controls for those countries which are feeling the weight of excessive exchange rate appreciation, such as Brazil and many others. This is the interpretation made by many analysts.

The final declaration says that emerging economies with adequate reserves and overvalued exchange rates may take "careful macro measures." This point had not been covered in the earlier text set by the finance ministers of the group two weeks ago.

Capital controls are no longer taboo

"I believe the G-20 is giving approval for any capital controls, now seen as an effective way to limit the negative effect of investment portfolios," said Marco Annunziata, Unicredit's chief economist,  "Capital controls are no longer taboo."

Jane Foley, Chief strategist exchange at Rabobank, says he G-20 recognizes that is currently not in a position to prevent actions such as Brazil's, which raised the tax on foreign capital. She said this would only be possible if there were international penalties that would require much political commitment of the authorities. "Preventing these measures would also bring more criticism about the Federal Reserve policy,".

The determination of the G-20 is particularly important for Brazil, which recently adopted a series of actions to stem the heavy flow of foreign funds and the Real appreciation. The Brazilian government blames the ultra-accommodative strategy of the United States for the inflow of ollars. There are significant worries about bubbles in emerging markets.

Chris Turner, chief strategist of foreign exchange at ING, also interprets the phrase the G-20 as a liberation for the capital controls.

Shocking Victory

This section of the statement was also welcomed by South Korea and has generated expectations that the country may take initiatives to curb the appreciation of its currency. Rhee Chang-yong, a member of the committee preparing the meeting of Korea, said the possibility of imposing measures is a "shocking" victory that will allow the authorities of some countries to intervene in the exchange..

Lee Myung-bak , South Korea's president, also said his country will act against excessive flow of capital and reiterated that it will consider further steps to limit the inflow of funds.

With news from O Estado de Sao Paulo.

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