COMMENT: G20 meets in Ankara to try to fix what ails the world

By bne IntelliNews September 4, 2015

Ben Aris in Moscow -


The world’s finance ministers and central bank governors are meeting this weekend in the Turkish capital of Ankara to fix the ailing global economy, yet are unlikely to make much progress.

The malaise that’s taken hold of emerging markets is well illustrated by the host country of the G20 meeting. The Turkish lira continues to slump to record lows against the dollar and was inches away from another one on September 4 as it traded near TRY3.0 to the dollar. Turkey’s currency is only the latest emerging market currency to tumble on the back of volatile oil prices and the reverberations of a Chinese slowdown, amongst other factors.

The economic malaise has spilled over into politics. Eastern Europe is already tearing itself apart over the Russia-West standoff about Ukraine’s fate, but a growing refugee crisis is now transmitting the distant “it’s not our problem” war in the Middle East into the heart of political agendas in Europe. The “we should do something” calls are rising, especially after pictures of a dead Syrian boy, Aylan Kurdi, washed up on a Greek beach were splashed all over Europe's front pages this week.

Political tension is set to only rise. Ukraine goes to the polls in October for crucial regional elections that are a requirement of the Minsk II peace agreement signed last year. Turkey will also hold a snap election in November after a general election in June failed to produce a government. Turkish President Recep Tayyip Erdogan has made it clear he intends to ensure his AK Party wins a majority and the authorities have been liberally applying the terrorism laws to crush the opposition media. The population has responded with half-hearted street protests that were quickly quashed, but with the Turkish economy sinkening and consumer confidence sinking, if Erdogan continues to turn the screw, a repeat of last year’s Gezi Park protests is a real possibility. Indeed, last week already saw a small peaceful demonstration in the Taksim district of Istanbul. Poland is also due to hold important elections in the next two months.

All these elections are distracting politicians from getting on with the necessary job of implementing badly needed deep structural reforms across the region that would pave the way for a real economic recovery. In the meantime, central banks in the West at least have chosen to hold interest rates at close to zero. The most important discussion on the agenda will be when to start raising them again.

To raise or not to raise

This is a crucial discussion. In the early noughties, Emerging Europe boomed on the back of near-zero interest rates. It wasn’t until US rates reached 5.25% that money flowing into emerging markets seeking some sort of sensible return suddenly turned tail. In lieu of reform, and with massive debt on the order of 90% of GDP in most Western countries, central banks have chosen to keep interest rates low. The only way countries with this level of debt can afford to service their debt is if money is effectively free.

There has been much talk of the collapse of the resource-driven growth model in many emerging markets failing and the need for countries like Russia to wean itself off oil export revenues. This of course is true, but the flip side of the coin is that Western countries need to wean themselves off the massive debt/free money teet as well. The imbalances in the global economy that have been in place now for some eight years are scary and dangerous.

However, the necessary rate hikes to transform this artificially supported economic model to a real one with real returns on money, returning the global economy to a market-based economy, not a quantitative easing-based (QE) one, will probably not appear.

Ahead of this G20 meeting the International Monetary Fund’s (IMF) Christine Lagarde called on central banks to “refrain from raising interest rates” because of the threats to global growth. The US Federal Reserve has been threatening to raise rates this autumn, but Lagarde said better to wait until next year.  

In a telling sign of things to come, the European Central Bank (ECB) also met this week ahead of the G20 meeting and suggested that it would extend its version of QE into the middle of 2017. “We are getting back into the situation where bad news is good news for markets, as that means there will be more QE cash from the central banks,” Liam Halligan, bne IntelliNews editor-at-large, said in this week’s bneVideoBlog.

Emerging Europe will watch the meeting closely, as the decisions that come out of it will affect everyone directly. Promises of a rate hike will hurt the region by sucking out even more cash, whereas more QE in Europe will help, as a large chunk of this money finds its way into CEE capital markets.

However, low interest rates and pumping cash into the system only buys more time and the recent global slowdown shows that this can’t go on forever. 

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