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Sunday, 26 October 2008

U.N. says financial crisis needs global solution

GENEVA (Reuters) - Reform of the world's financial system requires a global approach and countries cannot act in isolation to deal with a crisis caused by uncontrolled international speculation, the United Nations said on Friday.
The United Nations Conference on Trade and Development (UNCTAD) said the U.N. had the most credibility to adopt that approach, as developing countries had a limited voice in other institutions.
The call for a U.N.-led approach comes as major rich and poor countries prepare for a series of meetings to review the architecture of the world's financial system.
In an inter-dependent world where financial markets are linked electronically, no country can act in isolation, UNCTAD, whose analyses of developing country economics are closely followed by investors, said in a policy brief.
"It's simply not possible today for all countries to generate current account surpluses or improve their international competitiveness simultaneously by devaluing their currency or cutting costs," UNCTAD said.
"One nation's advance is another's retreat."
COOPERATION AND REGULATION
Global cooperation and regulation were necessary in finance just as international trade in goods required a predictable rules-based system, it said.
"The failure of governments to pursue such an approach is the primary reason for the current global predicament," it said.
UNCTAD pointed to a close correlation between different asset prices recently, saying it was only explicable by interrelated speculation in commodity, currency and stock markets.
It said the foreign exchange market "carry trade," in which investors borrow in low-interest currencies to invest in high-interest units, had clearly moved many exchange rates in the wrong direction over long periods.
Contrary to economic theory, currency markets were not balancing the competitive positions of nations but driving them away from equilibrium by allowing speculation on interest rate differentials, which intensified global imbalances.
The currencies of countries such as Iceland, Hungary and Brazil had come under enormous devaluation pressure, it said.
And commodity and stock markets have come under pressure as the perception spread that the world was on the brink of a major recession and that policy measures to tackle the financial crisis could not prevent a drop in real activity, it said.
The recent drop in commodity prices has a good and bad side, UNCTAD said, affirming that a tremendous rise in food, metal and oil prices since mid-2007 was largely driven by speculation.

But the correction in this surge is hurting developing country commodity producers, by hitting export revenues and devaluing investments made in response to the earlier boom.

But it was good for countries relying on commodity imports.

UNCTAD called for three policy responses:

-- First, the international community should assist countries whose exchange rates have come under downward pressure, mainly smaller countries where recent unfettered speculation led to considerable currency overvaluation.

-- Second, the international community must assist commodity-dependent countries where speculation now threatens to drive prices far below levels reached before the full unfolding of international speculation in mid-2007.

-- Third, countries with low and falling inflation must stimulate their economies with interest rate cuts and fiscal measures.

"Fortunately, policymakers in many developed countries stand ready to fight big fires at home. Unfortunately, however, the thick smoke at home has clouded their view of their neighbors' fence," UNCTAD said.

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
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