[Viewpoiont] U.S.-Sino currency fires burn bright

Greek Prime Minister George Papandreou says he has found the culprit behind the country’s sovereign debt crisis.

He claimed Greece fell prey to sovereign credit-default swap speculation. He accused hedge funds of gorging on swaps - a derivative instrument that investors buy to hedge against possible defaults on corporate or government debt - because they expect Greece to default on sovereign debt, exacerbating the country’s credit crisis.

But the prime minister was no swift thinker to advertise that his country is on the brink of insolvency. Doing so spurred frantic buying of insurance protection against the country’s debt, which hoisted up risk-premiums. But the attackers at the same time have become his only excuse to appeal for support from his unsympathetic European counterparts and antagonistic labor unions to save the country from greater fallout.

Some blame the strengthening of the euro for the financial woes of Greece and Spain. They say the countries could have fixed their fiscal problems with a sovereign currency that matched their weaker economies. But it is naive to think a weak currency can fix an economy by incurring a trade surplus.

When the value of Asian currencies crumbled in late 1997, contagious worries over Asian states’ creditworthiness culminated into a crisis before any trade surplus could help. Foreign borrowing by Greece and Spain is among the highest in the world, 21st and 8th respectively, far outweighing their economies. They could not have sustained themselves without the protection of a solid euro zone.

The currency debate dominates other corners of the globe. Legislators from both the ruling and opposition parties in Washington have united to present legislation demanding stronger action to force appreciation of the Chinese currency, which would mend the country’s worsening trade deficit.

Democratic Senator Charles Schumer, in crafting the legislation, said the U.S. was sending a strong message to China. “If you refuse to play by the same rules as everyone else, we will force you to.”

Liberal columnist at The New York Times, Paul Krugman, advocated a hard stand against China such as labeling China a currency manipulator, which could lead to trade sanctions. “We have no reason to fear China,” a major holder of U.S. Treasury bonds, he said, as dumping the bonds would incur huge losses for China in its asset value.

Simply put: They’re too big to sell. Interest rates will also stay steady because the Federal Reserve will likely keep the short-term rates at near zero levels until job rates improve.

But in real life, an economic conundrum does not always fit into a simple equation. We have an earlier lesson from Europe. France in 1928 held the world’s largest foreign reserves and came under attack by the British for inhibiting the pound sterling.

France then dumped sterling assets for the next four years, leading to a pound collapse and massive losses for France, which pushed its central bank into a technical bankruptcy.

A head-on collision between two economic powerhouses bodes badly not only for both countries, but economies around the globe. First of all, China is too proud to give into U.S. pressure. Prime Minister Wen Jiabao warned against strong measures to force other countries to appreciate their currencies. The country has begun reducing its U.S. portfolio.

China’s lukewarm response to calls for currency revaluation is hardly surprising. During the Copenhagen Climate Conference in December, Chinese officials carelessly danced out of step. When asked about Beijing’s guidelines on greenhouse gas emissions, the officials said they have not received orders from the state because their mobile phone batteries were dead.

Pinning the tail on the scapegoat provides diversions from real problems and an easy escape from a difficult situation. As the public grows weary and suspicious of Wall Street greed, U.S. congressmen began blaming Chinese currency for the economy’s slow recovery and worsening unemployment.

The Greek prime minister also found faceless speculators easier to blame than looking closer to home for the real cause of its problems. They are all looking for an easy political escape from the economic trap. There is a saying that it is unwise to grab a leopard’s tail, and if you do grab, do not let go. There is no knowing what could happen if Washington and Beijing start grabbing each other’s tails.

But we should keep our focus and maintain distance from the finger-pointing game. Quick judgment is often followed by regret. We must set our own exit policy and walk unswervingly toward that path.

We don’t know when the Sino-U.S. trade conflict will affect the Korean market. Until it does, we should remain aloof. It is better and safer to watch a fire from a distance.

*The writer is an editorial writer of the JoongAng Ilbo.
Translation by the JoongAng Daily staff.

By Lee Chul-ho