Harper Clashing With Rousseff on Capital Controls May Herald G-20 Discord

Canadian Prime Minister Stephen Harper may clash with Brazilian President Dilma Rousseff today as she rejects pressure to scale back capital controls aimed at checking a rally in her country’s currency.

Harper is in Brasilia for talks that will include currency policies, Brazil’s ambassador to Canada, Piragibe Tarrago, said last week. Harper may push Rousseff to rely less on capital restrictions, such as taxes on bond purchases by foreigners, which are undermining prospects for a G-20 agreement on resolving global economic imbalances, said John Kirton, co- director of the University of Toronto’s G20 Research Group.

Brazil may be preparing “more dramatic” currency policies that could have “a negative ricochet effect on how the G-20 framework for strong, sustainable economic growth unfolds,” Kirton said. “For that reason alone, Canada does need to try to move our Brazilian colleagues into doing something that doesn’t damage the broader G-20 process.”

Today’s meeting comes as central banks from Switzerland to Japan try to offset currency gains amid concerns the U.S. economy may be headed into recession, prompting investors to seek assets from faster-growing regions. Latin America’s largest economy has struggled to absorb its share of the more than $1 trillion in annual net private capital inflows to emerging market economies, and Canada has seen record foreign investment in bonds in each of the past two years. Brazil’s economy grew 7.5 percent last year after shrinking 0.6 percent in 2009, while Canada posted 3.2 percent growth in 2010 after a 2.8 percent contraction the year before.

Currency Gains

Brazil’s real has surged 45.3 percent against the U.S. dollar since the beginning of 2009, the second-biggest gain among a basket of 31 major currencies tracked by Bloomberg. The Canadian dollar has increased 23.5 percent over the same period, the 11th biggest gain. The increases make it harder for companies like Montreal-based forest-product maker Tembec Inc. and Rio de Janeiro-based miner Vale SA to sell goods abroad.

While both countries have seen their currencies rise, they differ on how to blunt the impact. A failure by Rousseff and Harper to smooth over their differences could be a sign G-20 leaders will be unable to make progress on the issue when they meet in France in November. The G-20 agreed in April to work toward “coherent conclusions for the management of capital flows” as part of an “action plan” to support global growth.

G-20 Conference

The G-20 will “cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets,” the group said after a conference call in a statement provided today by South Korea’s finance ministry.

Canadian spokesman Dimitri Soudas, speaking to reporters about Harper’s visit, said it is “critical” for G-20 countries to work together, adding that the group “agreed that stable monetary and exchange rate policies must be a part of the framework for strong, sustainable and balanced growth.”

To ease pressure on the real, Brazil has tripled a tax on bond purchases by foreigners and raised levies on borrowing abroad. Last week, Finance Minister Guido Mantega slapped a tax on bets against the dollar in the futures market.

Canada, which hasn’t intervened to affect the Canadian dollar in 13 years, argues G-20 countries should move toward a goal of freely floating exchange rates and no capital restrictions. Bank of Canada Governor Mark Carney said in a March speech to the Inter-American Development Bank that while capital controls may be “appropriate” in some circumstances, especially in countries with underdeveloped financial systems, they should be temporary, targeted and “transparent.”

No ‘Moral Authority’

Mantega said other G-20 policy makers shouldn’t criticize Brazil for trying to stem the rally in its currency. “These countries are the ones causing the currency problems,” Mantega said in an Aug. 5 interview in Lima ahead of a meeting of South American finance officials. “They don’t have any moral authority to speak against currency intervention.”

While he didn’t single out any country, Mantega has in the past criticized the U.S. Federal Reserve for keeping its benchmark rate between zero and 0.25 percent and buying assets to stimulate the economy, as well as China for boosting exports by keeping the yuan undervalued.

An Aug. 3 statement by the International Monetary Fund called Brazil’s use of capital controls an “appropriate tool.” Still, the Washington-based lender said such measures are “prone to circumvention” and can have “distortionary effects” on the economy.

‘Legitimate Tool’

Former Canadian Prime Minister Paul Martin, who co-chaired the first meeting of G-20 finance ministers in 1999, said Brazil’s policies are a “legitimate tool” for blunting speculation, and will do little harm to countries such as Canada. He said one motivation for creating the G-20 was to help developing countries cope with currency speculation in the wake of the Asian financial crisis in the late 1990s.

“The reason that Thailand especially and Indonesia got into difficulty is exactly the problem that Brazil is worried about, which is the flow of hot money into the country,” Martin said in an Aug. 2 telephone interview from Montreal. “It’s perfectly understandable that a country’s going to want to protect itself.”

Harper will be greeted by Rousseff at the Itamaraty Palace, the home of Brazil’s Foreign Ministry, where the two leaders will meet over lunch. While they are scheduled to hold a press conference after their meeting, details haven’t been confirmed. The next day, Harper will be in Sao Paulo to deliver a speech to a business audience.

‘Exploratory’ Trade Talks

Harper and Rousseff’s meeting, the first since the Brazilian president took office Jan. 1, comes as the countries try to deepen trade and investment ties. On a June trip to South America, Trade Minister Ed Fast said Canada will pursue “exploratory” trade talks with Mercosur, the trading bloc comprising Brazil, Argentina, Paraguay and Uruguay.

“Canada has had great difficulty looking beyond the United States into the rest of the Americas,” Fast said in a July 29 interview. “Canadian businesses need to start opening their eyes and saying, ‘Hey, here’s an economic opportunity we’ve missed for too long.’”

The challenge for Brazil and Canada will be to overcome a history of trade tensions, including a dispute dating from the 1990s over subsidies for aircraft manufacturers Embraer SA of Sao Jose dos Campos and Montreal-based Bombardier Inc., said Andrew Cooper, a research fellow at the Centre for International Governance Innovation in Waterloo, Ontario.

The two countries haven’t always clashed at the G-20. Brazil and Canada both opposed a proposed global bank tax at last summer’s Toronto summit, where Harper presided, arguing a levy would unfairly punish their banks for problems originating elsewhere. Canada and Brazil have also resisted some French proposals aimed at curbing rising food prices.

“There are huge historical differences, but there seems to be a convergence now,” Cooper said by telephone.

To contact the reporter on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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