Brazil calls for currency system overhaul

The G20 group of big economies must tackle the causes of global economic imbalances instead of getting bogged down in debating how to measure the problem, said Guido Mantega, Brazil’s finance minister.

In an interview with the Financial Times on the eve of the G20 finance ministers’ meeting in Paris, he blamed excessive liquidity in developed economies – including the US and Europe – for soaring commodity prices and destabilising capital flows into emerging economies.

He called for a fundamental reform of the international currency system, to expand the use of special drawing rights from the International Monetary Fund as an additional reserve currency, and inclusion of both China’s renminbi and Brazil’s real in the SDR basket, alongside the US dollar, the euro, the yen and the British pound.

Warning again of a “currency war” destabilising the world economy, he said a “new monetary system” must be based on a basket of currencies “that will better express the reality of the world economy today”. The IMF, he added, should transform itself into a “global issuing bank” to underpin the expanded use of SDRs.

“What we really have to do is tackle the causes of the imbalances that we face today, imbalances in capital flows, and imbalances of currencies, which affect our trade imbalances,” he said.

“It is not so easy to ad­vance towards reform of the international monetary system that has existed for more than 50 years, but at one moment we will have to start. This system is not working any more.

“Of course this will take a while. But we cannot blame the inefficiency of the system without moving towards a solution.”

He said Brazil had seen an appreciation of its currency, the real, of some 50 per cent between 2006 and 2010. Capital inflows had increased by 50 per cent in 2010 compared with 2009.

“It is very difficult to manage,” he said. “One of the reasons is the monetary issuing policies of the US and the UK too, and other European countries. The other reason is that our situation is more solid than in other emerging countries.”

He defended Brazil’s in­troduction of capital controls to slow down the inflow, and rejected suggestions from other G20 countries that such controls should be subject to strict new rules.

“We have to make it clear that we limit capital flows because we have no other alternative. We would prefer to have capital freedom and a freely floating exchange rate system. We are only using these limits because others are using their exchange rates as a weapon for trade.”

Mr Mantega, who first warned of a global “currency war” last year, also spoke out strongly against any moves to regulate commodity markets in order to curb the rise in prices for foodstuffs, oil and minerals.

He said there were “multiple causes” for the price rises, including excessive liquidity from developed countries, increasing de­mand from emerging countries, and climate change that had caused drought in Russia and other parts of Europe. Another cause was the subsidy policy of the European Union.

“To interfere in this market with some form of price control will end up having the opposite effect to what is intended: to inhibit the supply side,” he said.

“We need a continued effort to stimulate the supply side.”

But he did back a French proposal for a more transparent commodity market.