G7 bankers warn US over deficit and dollar

Some the world’s major central bankers have warned the US that the international community could be running out of patience with the massive US budget and trade deficits that have pushed the dollar lower and increased the cost of their exports in America.

But US Federal Reserve Chairman Alan Greenspan said before the official opening of the Group of Seven finance ministers meeting that factors including the weaker dollar and tougher budget discipline in Congress may finally start to restrain the growth of the trade gap.

America’s own campaign to push China to untie its currency from the dollar as quickly as possible appeared to make little headway.

European Central Bank president Jean-Claude Trichet said at a conference of business leaders and government officials yesterday that it was unacceptable for developed countries to run long-term current account deficits.

“The industrialised world as a whole is in deficit, there is a current account deficit, and there is no offsetting of the US current account deficit by the other industrialised countries,” Trichet said.

“That of course means that we are structurally asking the rest of the world to finance us. ... It doesn’t seem to me that this is an acceptable and sustainable long-term feature of the present functioning of the global economy.”

The US deficits are expected to be a significant item of discussion during talks today among the ministers from the G-7 nations – Britain, Canada, France, Germany, Italy, Japan and the US.

The Bush administration has pledged to halve the budget deficit by 2009, but also intends to argue that trade partners concerned about the deficits should be speeding up their own growth and relying less on exports to America.

The US deficits have been a drag on the dollar, putting European and Asian manufacturers who want a slice of the key US consumer market at a disadvantage.

While Washington insists it has a “strong dollar” policy, many analysts believe the US government is content to see the dollar fall because it makes US exports cheaper.

Bank of England Governor Mervyn King said the trade and budget deficits and the purchase of large US dollar reserves by Asian countries were combining to cause ”global imbalances.”

He warned that the situation would improve only when governments agree on the “nature of the risks inherent in current international monetary arrangements.”

The US has been campaigning strongly for China to unhook its currency, the yuan, from the US dollar as soon as possible. US Treasury Department officials led by John Taylor, the under-secretary for international affairs, pushed their case yesterday during talks with People’s Bank of China Governor Zhou Xiaochuan and Chinese Finance Minister Jin Renqing.

The US emphasised that market forces are important and will help China as it grows into the world’s largest developing economy, a senior treasury official said after the talks. The official said the US acknowledged China has taken steps but the US isn’t yet satisfied.

Zhou, however, hinted in his speech that China will be asking for a reprieve. He did not address the issue directly, but said China needed more time to reform its economy – a position Chinese officials have maintained in the run-up to the meeting, where China has guest status.