O'Neill downplays currency volatility impact on trade

WASHINGTON (AFX) - Treasury Secretary Paul O'Neill downplayed the impact of currency volatility on trade, saying businesses are able to hedge against such risk.

O'Neill was asked in a Congressional hearing whether provisions for currency volatility should be included in trade agreements, because the U.S. could be at a disadvantage if a trading partner were to devalue after signing an agreement.

"It's not possible, and probably not desirable, to protect (U.S. producers) against possible shifts in the world," he said.

Business managers are able to use derivatives and other mechanisms to manage risk over time, he noted.

"If you know what you're doing, you can make money in very substantial ways in a world that's fraught with uncertainty (including) currency rate changes," he said.

O'Neill also emphasised that a prime objective of international financial reforms ought to be to reduce the possibility of "contagion" from one country that gets into financial distress to others.

"We should develop mechanisms that defeat the very idea" of contagion, he said, and "not accept this proposition (that) weakening financial conditions" in one country leads to a widespread withdrawal of investment from several countries.

While the Bush administration has been focused on dealing with the immediate challenges of crises in Argentina and Turkey, O'Neill explained his longer-term objective is "to develop ways to limit (problems) to individual 

countries."

Key to this effort will be identifying troubling developments before they create a crisis that could have a "domino effect" on other countries, he said.

The IMF and other institutions, for example, ought to be "especially vigilant" when a country sees its capital inflow dominated by "hot money," or short-term financial transactions, rather than direct investment in physical assets, he said.

O'Neill also said he does not favor complete debt forgiveness for highly indebted countries, although he reiterated support for the international debt relief effort for the poorest countries.

He emphasised that in principle countries must be held to their previous contractual debt obligations.

O'Neill noted his exchange with Russian Finance Minister Alexei Kudrin at the G7 meeting in February, when Kudrin claimed Russia could not pay sovereign debt obligations due to a lack of parliamentary authorisation.

"Frankly, I don't give a damn if some part of your government doesn't want to pay," O'Neill said he told Kudrin, adding that "that's your problem."

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