Asian countries launch swap agreement

Thursday, March 25, 2010

March 24 2010
By Kevin Brown in Singapore
Financial Times

Thirteen Asian countries on Wednesday launched a $120bn currency swaps agreement to provide emergency US dollar liquidity to nations facing a foreign exchange crisis.

The Chiang Mai Initiative Multilateralisation agreement, 80 per cent financed by Japan, China and South Korea, is a multilateral extension of a network of bilateral swaps deals reached after the 1997/98 Asian financial crisis.

However, economists said it was unlikely to pave the way for an Asian Monetary Fund that could provide a regional alternative to the International Monetary Fund.

“There is certainly no harm in it, but it is quite a long way from here to any form of AMF,” said Michael Buchanan, Asia chief economist at Goldman Sachs in Hong Kong.

“If you want to have true objective conditional lending, that is quite hard for neighbouring countries. It is much easier to rely on the IMF for that,” he said.

The agreement allows the three main financing countries and the 10 members of the Association of South East Asian Nations to seek emergency dollar funding of between 0.5 and five times their contributions to the fund.

However, 80 per cent of any swaps approved will be subject to IMF conditions, such as economic reform programmes of the kind imposed by the global lender in 1997/98.

This leaves only 20 per cent of the fund subject to a purely Asian decision-making process. As a result no member country will be able to receive more from the fund than it has contributed, unless the IMF approves.

Officials say this restriction may be eased once a proposed regional surveillance unit is established to monitor economic trends and supervise the use of disbursements from the fund.’

However, much of the urgency behind the drive for a broader Asian financial institution has dissipated in the wake of the huge foreign exchange reserves accumulated by many Asian countries since 1997/98 through large and sustained trade surpluses.

The initial proposal for an AMF was made in 1997 by Eisuke Sakakibara, then Japan’s deputy finance minister, but it was never established because of strong opposition from the US.

The idea continues to surface in policy discussions, notably in Japan. Supporters such as Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo, say an AMF could promote exchange rate stability, encourage regional bond market liquidity and project an “Asian voice” on financial matters.

It also retains some traction in south-east Asian countries such as Malaysia and Thailand that were angered by tough conditions attached to emergency loans extended by the IMF in 1997/98.

The Asean members of the multilateral agreement are Indonesia, Thailand, Malaysia, Singapore, the Philippines, Vietnam, Cambodia, Burma, Brunei and Laos. Hong Kong participates as a self-governing Chinese territory.


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