Trade imbalance targets elude G20

(FT) -- Leaders from the G20 group of leading economies will next month seek to agree specific guidelines on reducing global trade imbalances, in a fresh attempt to head off a potential "currency war".

Finance ministers and central bank governors, meeting this weekend in the South Korean city of Gyeongju, agreed on a policy framework to contain large current account surpluses and deficits, but a proposal to set specific targets ran into opposition.

The dollar traded near a one-week low against the euro or $1.3997 against the single currency in Asian time trading after the meeting, before coming back .

The meeting also announced significant progress in reforming the International Monetary Fund, shifting power away from Europe and towards emerging nations like China and Brazil.

Analyst reaction was muted. Eswar Prasad, a former IMF official now at Cornell University in the US, said a previous attempt to impose tougher IMF surveillance of current account imbalances had achieved little while the threat of such monitoring was unlikely to trigger policy changes in countries with large surpluses and deficits.

Todd Elmer, of Citigroup, said: "The meeting produced little pressure for the US to back away from its accommodative stance which has fuelled dollar depreciation, it does not call more strongly for increased flexibility in Asia and it appears to leave an out for some countries, like Japan, to pursue intervention or capital controls."

The US, which has been pushing China to allow its currency to rise and reduce its huge trade surplus, claimed victory. Tim Geithner, Treasury secretary, said after the meeting: "The most important thing we achieved is agreement on a framework for curbing excess trade imbalances in the future."

But the statement issued by the ministers left unclear how the imbalances would be reduced. The communiqué also issued a clear warning to the US that loose monetary policy could continue to push volatile capital flows into emerging economies.

European nations agreed to surrender two of their seats on the IMF's 24-member executive board to make way for emerging nations, who will also receive a greater share of "quotas", which determine voting power. But the exact decisions on reorganising quotas was deferred until 2012.

Christine Lagarde, France's finance minister, agreed the shift to combating imbalances would offer a sense of purpose to the French presidency of the G20 next year. The US and South Korea had also sought to forge consensus on a numerical target for surpluses and deficits at this weekend's meeting, suggesting a cap of 4 per cent of gross domestic product. But the idea of a specific target ran into stern opposition from Germany, Brazil and Japan.

By Christian Oliver, Alan Beattie and Peter Garnham, FT.com