Geithner, Brown Split on Tobin Tax as G-20 Seeks Rebalancing
Nov. 7 (Bloomberg) -- Group of 20 governments split onwhether to tax financial trading as part of a broader strategyto ensure the global economy’s expansion is less crisis-prone.
U.K. Prime Minister Gordon Brown told a meeting of financechiefs in St. Andrews, Scotland today that such a levy couldprevent excessive risk taking and fund future bank rescues,adding momentum to a debate begun by France. U.S. TreasurySecretary Timothy Geithner said a “day-by-day” tax onspeculation is “not something we’re prepared to support.”
The dispute over a so-called Tobin tax suggests that theunity the G-20 showed in battling the worst financial crisissince the Great Depression is unraveling as its focusintensifies on how far to rein in the banking system. Theoutcome may determine the strength of markets as the recoverybuilds as well as the scope for banks to profit from them.
“The initial market reaction to talk of a Tobin tax islikely to be negative,” said Julian Jessop, a former U.K.Treasury official and now chief international economist atCapital Economics Ltd. in London.
A day after U.S. data showed the unemployment rate rosemore than economists forecast to a 26-year high, the G-20 alsoagreed to keep stimulating their economies until recoveries takehold. They mapped out a time plan to show how they will makegrowth across the world more even and less reliant on Chinesesavings and U.S. domestic demand.
Chinese Currency
Tensions flared over China’s currency policy and how tofund the fight against climate change. While Chinese centralbank Governor Zhou Xiaochuan said he doesn’t think his countryis facing too much foreign pressure, Japan said a more flexiblecurrency would be desirable. The International Monetary Fundsaid today the yuan is “significantly undervalued.”
Brown, who has resisted pushes for Tobin tax in the past,said it “cannot be acceptable” that banks enjoy the rewards oftheir successful trades yet leave taxpayers to pick up the costof their failures. Governments spent more than $500 billion inthe past year bailing out banks from Citigroup Inc. to RoyalBank of Scotland Plc.
The U.K. call to explore a levy on trades was welcomed byFrench Finance Minister Christine Lagarde, and rebuffed byCanadian Finance Minister Jim Flaherty.
“It’s not so exotic and it even seems reasonable,”Lagarde told reporters.
Brown’s View
Brown, who didn’t say whether he’d ultimately endorse sucha levy, said any policy would need to be implemented by allfinancial centers including those in the Middle East, Asia andSwitzerland.
For Brown, who is trailing in polls less than seven monthsbefore the next U.K. election is due, the comments are alsodesigned to open a divide with the Conservative opposition.While the Conservatives say the biggest risk to the economy isthe government’s record budget deficit, Brown has stepped uphis attacks on banks.
Geithner’s opposition potentially kills off the proposaleven before the IMF reports on its feasibility in April. He saysthe U.S. would prefer to cover the cost of bailouts by forcingbanks to repay rescue funds once the crisis is over.
Economists say the risk is that any levy would eventuallybe circumnavigated by investors and do more harm than good.
“The idea of trying to tax transactions is a populistmeasure that may appeal to those upset with banks, but would beshort-sighted,” said Bill Witherell, chief global economist atCumberland Advisors Inc. in Vineland, New Jersey, which oversees$1 billion in assets.
Stimulus Measures
G-20 ministers did agree to maintain stimulus measures tocement the recovery from the worst recession in six decades, oneday after data showed the U.S unemployment rate jumped to 10.2percent in October.
“A credible medium-term plan to cut deficits is needed totackle shortfalls in public finances,” Brown said. For now, “aself-sustaining global recovery hangs in the balance.”
Concerns are mounting that emergency measures are alreadyfueling more financial imbalances. The IMF said today tradersare probably using the dollar to fund “carry trades” acrossthe world and the currency may still be overvalued after itsslide this year.
“There are indications that the U.S. dollar is now servingas the funding currency for carry trades,” the IMF said.“These trades may be contributing to upward pressure on theeuro and some emerging economy currencies.”
To ensure the next expansion is more balanced, the G-20also signed up to a plan in which they will acknowledge theweaknesses in their economies, lay out plans to fix them andsubject themselves to an IMF-led examination by counterparts.
Timetable Agreement
They agreed to a timetable in which they will submitreports on their own economies by the end of January, receive aresponse from the IMF in April and refine their programs for asummit of leaders in South Korea next November.
The G-20 failed to reach an agreement on how to fundpolicies to tackle climate change, which may cost as much as 100billion euros ($148 billion) a year in developing countriesalone. Doubts are growing whether a full agreement can bereached at a United Nations summit in Copenhagen next month.
While German Finance Minister Wolfgang Schaeuble said theofficials agreed that “Copenhagen mustn’t fail,” they “didn’tget quite as far” at today’s talks as they’d hoped.
“The meeting turned out to be a mostly irrelevant sideshowon the way to the Copenhagen talks,” said Richard Dixon, adirector of WWF Scotland, an environmental pressure group.
The policy differences expose how the G-20, anointed as theleading forum for economic cooperation by world leaders inSeptember, may find it easier to manage a crisis than arecovery.
“Each day the crisis recedes, the old battle-linesreemerge and it gets tougher to find common conclusions,” saidTim Adams, a former U.S. Treasury official who is now managingdirector at the Lindsey Group in Fairfax, Virginia.
To contact the reporters on this story:Emma Ross-Thomas in St. Andrews at aterossthomas@bloomberg.net;Simon Kennedy in St. Andrews at skennedy4@bloomberg.net.
Last Updated: November 7, 2009 14:02 ESTSource: Bloomberg
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