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Sunday, July 5, 2009

ECB Noyer:Must Avoid Excessive Accumulation Of Forex Reserves

AIX-EN-PROVENCE, France -(Dow Jones)- European Central Bank board member Christian Noyer Sunday called for for more stability in the global currency market and for action to avoid some countries setting aside excessive currency reserves.

"We must ensure a bigger stability between currencies in the coming months," Noyer said at an economist conference in southern France. "We must avoid...the piling up of currency reserves," and find more efficient ways of financing global trade, he added.

"We must ensure a bigger stability between currencies in the coming months," Noyer said at an economist conference in southern France. "We must avoid...the piling up of currency reserves...we need mechanisms of financing world trade."

Global world trade imbalances have contributed to the build up of massive currency reserves in exporting countries, such as China and Japan, and of huge deficits in importing countries, such as the U.S.

The Organization for Economic Cooperation and Development forecasts world trade will shrink 16% this year.

An increase in transactions denominated in non-convertible currencies, such as the Chinese yuan, suggest world trade is going back to bilateral exchanges, Noyer said.

"When you take a look at the number of swaps with currencies that aren't convertible or transferable, in a certain way this means that we're going back to bilateralism in international trade," he said.

Noyer also warned against ballooning budget deficits, as countries channel money into stimulus plans to fight off the downturn.

This year, budget deficits are likely to reach record levels in the world's largest economies. The U.S. expects a budget deficit of 13.2% of gross domestic product, and the euro-zone's budget deficit is heading toward 5.9% of GDP.

Economists see this as a dangerous pattern, as they fear rating agencies may strip some countries of their investment-grade rating, making financing much more expensive.

"The debt-to-gross domestic product ratio has increased in all countries - it's normal and inevitable. But (once the crisis is over) a reduction...is necessary," Noyer said. "Indebted countries are weak, especially vis-a-vis the markets."

"We don't need another crisis of sovereign debt...We need strong states, we need sound public finances," Noyer said.

The Bank of France governor also urged moderation in regulatory competition among states, arguing it could result in a dangerous race to the bottom.

"Excessive regulatory competition isn't a good thing," Noyer said. "In the future, we'll need to find a balance between the need for worldwide regulation and the market."

"In fact, regulated players are the ones that took on the largest amount of risk...that stems from regulatory arbitrage" on the part of players trying to find regulated markets with the loosest regulatory standards, he said.




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