Euro crisis, yuan sow discord as G20 gathers

Daniel Flynn
Germany's Chancellor Angela Merkel is seen inside a car as she leaves Ho Chi Minh City, October 12, 2011. Merkel left Ho Chi Minh City for Mongolia after a two-day visit to Vietnam. REUTERS/Kham

PARIS (Reuters) - G20 finance ministers will press Europe this week to find an urgent solution to its debt crisis, with a row between Washington and Beijing over the yuan threatening efforts to address broader global imbalances.

An economic slowdown and market slump has been met with discord within the Group of 20 rich and developing economies that makes up 85 percent of global output, a stark contrast to 2009 when the group launched a coordinated stimulus to pull the world economy back from the brink.

From Brasilia to Tokyo, impatience has grown at Europe's failure to turn the page on a debt drama that has roiled markets and threatens to shatter confidence in a fragile world recovery.

Disagreement within the euro zone over how to recapitalize banks and stabilize Greece make any breakthrough unlikely at the two-day G20 ministerial meeting starting in Paris on Friday, with policymakers targeting an EU summit on October 23 as the key forum.

Anger has resurfaced in Washington over the level of the yuan, prompting warnings from Beijing that a bill approved by the U.S. Senate on Tuesday to press China to lift its value could prompt a trade war and derail efforts to promote global growth.

Washington has also urged countries that are in sufficiently robust shape, such as Germany, to soft-pedal on austerity measures or even inject fresh stimulus.

Berlin has not proved to be receptive and a defeat for President Barack Obama's $447 billion jobs stimulus bill in the Senate on Tuesday leaves the United States in a weaker position to prod others.

The G20 finance ministers are expected to make progress in some areas, including support for an increase in the IMF's firepower to cope with the growing threat of crises in large, developed economies.

It should also give the green light to regulators for new rules on banks deemed 'too big to fail', including capital surcharges, due to be officially approved by G20 leaders at a summit in Cannes on November 3-4 that wraps up France's presidency.

"I'm not expecting any big announcements this week. Ministers are not going to pre-empt their leaders," said one G20 delegate. "The final communique will affirm that the Cannes summit will announce short- and medium-term steps to stabilize the global economy."

French President Nicolas Sarkozy and German Chancellor Angela Merkel have pledged to find a permanent solution before the Cannes summit to get the euro zone debt crisis under control, but a decision to delay by a week an EU leaders summit to approve a deal suggests a consensus remains elusive.

While Germany is leaning toward a second round of losses for Greek bondholders, Paris is reticent.

Doubts remain on how to leverage the 440-billion-euro European Financial Stability Facility rescue fund, something Washington has pushed for, and the role it should play in providing perhaps 100 billion euros in fresh capital for the region's banks.

Complicating matters, Slovakia's parliament on Tuesday rejected a prior euro zone plan to ramp up the EFSF's firepower.

"It's really early days. They can't be precise at the G20 level until the Europeans have decided," said Gilles Moec, senior European economist at Deutsche Bank. "The November G20 summit is a realistic target to have a framework. Of course, the implementation will take much longer."

Brazilian Finance Minister Guido Mantega said on Monday he expected G20 nations to discuss extending further support to the IMF to help manage the European debt crisis.

"A deal on expanding the resources is something which could be deliverable by Cannes," said the G20 source. "The French support this."


The deepening of the euro zone crisis has derailed Sarkozy's stated aim of using France's year-long presidency to launch a fundamental rethink of the global financial system and its reliance on the U.S. dollar. After November's summit, France passes the G20 baton to Mexico, which has elections next year.

In Paris, ministers will discuss the measures needed to tackle economic imbalances blamed for helping to trigger the 2007-09 financial crisis -- such as the persistent U.S. trade gap and the correspondingly large surplus in China.

A G20 meeting in April placed seven large economies under review -- the debt-burdened United States, export-rich China, France, Britain, Germany, Japan and India. Officials have said privately the aim was to get Beijing to discuss the yuan, and China's cooperation is essential to the success of the process.

China, which has let the yuan revalue 30 percent against the dollar since 2005 and says it is committed to gradual reform, called on Obama to veto the Senate bill which would allow Washington to slap tariffs on imports from nations found to be undervaluing their currencies.

"There'll be strong pressure on China to agree to revalue the yuan but it's uncertain how this will play out in terms of the communique. China can argue now is not the time to do it and that European-U.S. fiscal problems are more important," said another G20 official.

France has dangled the prospect of China's yuan entering the basket of currencies making up the International Monetary Fund's Special Drawing Right (SDR) in a bid to divert the debate away from its value and onto the criteria of free "usability" required for this.

A French official said an agreement on the necessary steps was expected by November's summit, but China was dragging its heels on specifying a timetable.

A drive for a G20 "code of conduct" on short-term measures allowing members to impose curbs on capital flows also appeared to be losing momentum in the face of emerging economies' resistance, another official said.

"This G20 meeting will be quite interesting in the sense that reaching an agreement won't be easy in many areas," said one G20 official.

With governments at odds, there is some evidence of central banks trying to fill the void. The Bank of England authorized a new round of quantitative easing last week and in the emerging world, Brazil and Indonesia have cut interest rates.

Ministers may discuss a replacement for future ECB president Mario Draghi at the head of the Financial Stability Board global banking watchdog, but a decision will not be taken until Cannes when Draghi will also make recommendations on reinforcing the institution, which has just 20 staff.

(Additional reporting by Leika Kihara in Tokyo, Randall Palmer and Louise Egan in Ottawa, editing by Mike Peacock)