Markets on alert for G7 shift on currency

By Krishna Guha in Washington

Published: October 14 2007 17:09 | Last updated: October 14 2007 17:09

Currencies and the regulatory response to the credit crisis will top the agenda when world finance ministers, central bank governors and private sector bank executives meet this week in Washington for the Group of Seven summit and the annual meetings of the International Monetary Fund and the World Bank.

Foreign exchange markets in particular are on alert for any changes to the G7 ­communiqué that raise even the remote possibility of co-ordinated international intervention to support the dollar, which has fallen to its lowest levels against the euro in recent weeks.

This heightened sensitivity follows a high-profile public campaign by many European governments, led by France, for something to be done to halt the euro’s appreciation.

Banks feared media would misinterpret subprime woes
Banks were reluctant to disclose their exposure to US subprime mortgages during the credit squeeze for fear of being misinterpreted by the media, according to the head of the PwC accounting firm.

Speaking to the Women’s Forum for the Economy and Society in Deauville, France, Sam DiPiazza, global chief executive officer of the Big Four accounting firm, said: “The media handled that very poorly because they didn’t understand and they didn’t take the time to communicate the facts.”

Mr DiPiazza said he had met a number of bank executives who had fought shy of going public about their exposure.

“They said, ‘If I go out and tell the world we hold $10bn of subprime debt, the media will write we have $10bn of losses and we’re bankrupt.’ ”

The subprime mortgage crisis rippled through world credit markets this summer, undermining trust among banks, many of which stopped lending freely to one another. In the UK, that helped trigger a funding squeeze for Northern Rock, which led to a rush by savers to withdraw money. Some observers blamed the media for exacerbating this crisis of confidence. Reporting by Andrew Hill

Click here for further coverage and video interview from the Women’s Forum 2007Nicolas Sarkozy, the French president, last month said the eurozone “should not be the only area in the world where the currency is not put at the service of growth”.

Two former US Treasury officials told the Financial Times that it could be in the US’s interest to create some uncertainty about ­possible currency intervention – not in order to boost the value of the dollar but to ensure any further decline is orderly.

However, neither thinks that Hank Paulson, US Treasury secretary, will adopt this strategy. Mr Paulson, a former chairman of Goldman Sachs, believes that politicians have no business trying to establish the value of currencies that trade in deep and liquid ­markets, and would not ­succeed if they tried.

The US Treasury has signalled that it will not agree to any G7 statement that suggests that Washington wants the dollar to appreciate against the euro.

The UK, meanwhile, has sided with the US. Asked about whether the G7 should change its language on currencies, Alistair Darling, chancellor of the exchequer, said: “I think the G7 really needs to concentrate on, ­perhaps, some of the longer-term structural reforms that are necessary in the economies of the world.”

A hedge fund manager told the FT he worried that the French had overplayed their hand by raising expectations of the G7 meeting to the point where the absence of a policy shift could be seen as a green light for ­further dollar depreciation.

However, a head-on collision between the eurozone and the US at the G7 looks unlikely, following the European Union’s decision last week to tone down its rhetoric on the dollar, in response to the US formally backing a strong dollar and the need for China to allow the renminbi to appreciate.

This brings Europe into line with US thinking that the problem is not the fall of the dollar against the euro, but other currencies not sharing the burden of the currency’s decline.

In private, though, European governments, led by France, are expected to push for some new wording in the communiqué.

A former US official said the G7 would probably agree to “tweak” the language. This could involve some tougher words on the renminbi and, perhaps, the yen, with possible compromise language about monitoring “volatility” or “abrupt movements” in exchange rates.

He said the Europeans would probably spin this as being “really about getting the euro down”. But he said the US would not support this interpretation.

There is broader agreement on the regulatory agenda, with a “to-do” list that focuses on credit rating agencies, disclosure of banks’ exposure to off-balance-sheet investment vehicles, regulatory and incentive problems in the system by which financial institutions sell mortgage debts on to securities markets, and difficulties surrounding complex structured credit products.

The UK wants new international regulations that focus on liquidity rather than just credit risk.

These issues will be discussed at the G7 on ­Friday and the annual meeting of the IMF the following day, which brings together all the world’s finance ministers.

Differences over hedge funds – particularly between the US and Germany – still remain but have narrowed and are not a core issue.

However, the US wants policymakers to take time to analyse the crisis before leaping to regulatory solutions, a view backed by the IMF and central bankers and regulators on both sides of the Atlantic. Washington is also inclined to see more scope for market-based solutions to many of the failures exposed than are most European states.

In spite of domestic ­political pressure, Mr Paulson remains unwilling to scapegoat the rating agencies, emphasising the need to reform but not destroy them.

Additional reporting by Chris Giles and Gillian Tett in ­London, Bertrand Benoit in Berlin, Ben Hall in Paris, Ralph Atkins in Frankfurt and Tony Barber in Brussels.