ASEAN leaders plus three endorse currency swap plan
ASEAN leaders plus three endorse currency swap plan
SINGAPORE (Dow Jones): Leaders of 13 East Asian governments on Saturday informally endorsed a system designed to improve their capacity to help each other counter sudden currency fluctuations.
The presidents and prime ministers who discussed the so-called "Chiang Mai Initiative" didn't build upon the program that has been developed since May by the finance ministers of Japan, South Korea, China and the 10 Association of Southeast Asian Nations.
Several leaders expressed support for the plan which was launched at a meeting of finance ministers in Chiang Mai, Thailand. But they didn't specifically take any action on the swap agreements, which they say could help a country combat liquidity or balance of payments problems.
Nevertheless, their meeting in Singapore this week prompted the release of more details.
"Significant progress has been made since Chiang Mai," said a Japanese Ministry of Finance official.
The Chiang Mai Initiative has caught the attention of the foreign exchange market partly due to the sheer size of foreign exchange reserves held among the East Asian nations writing the arrangement, some $800 billion, by the Japanese finance ministry's count.
Foreign exchange reserves would be made available to the countries in the event their currency comes under speculative attack, as happened to Thailand through the first half of 1997, sparking the Asian financial crisis.
On one track, the program enlarges an existing ASEAN Swap Arrangement that has been in place since 1977, but apparently never used. The program's coverage will be expanded from the six most developed ASEAN nations to include the remaining four, Cambodia, Laos, Myanmar and Vietnam. Total size of the swap facility is also being boosted to $1 billion from $200 million. Singapore, Malaysia, Thailand, Indonesia, Brunei and the Philippines would each eligible to request up to $300 million from the others. The limit for four least developed economies would be $50 million.
More substantially, ASEAN governments are hoping to establish a network of bilateral swap and repurchase agreements between themselves and the region's power-sized economies, Japan, China and South Korea.
In Singapore this week, those governments reiterated their intention to see the plan implemented - and to see the funds largely tied to programs of the International Monetary Fund.
The Japanese official said an interest rate formula has been agreed, based on existing market rates plus a premium that isn't being made public.
The size of the bilateral arrangements with Japan, China and South Korea will be subject to negotiation.
Although IMF conditionality is important and the program is designed to supplement IMF bailouts, some money could be made available before a country in crisis reaches a support agreement with the Washington-based Fund. If funds are made available before an IMF program is in place, the maximum amount available will be limited to 10 percent of that country's credit line.
Malaysian Prime Minister Mahathir Mohamad said he opposes the plan to tie some of the funding to Washington-based Fund's prescriptions. "After all, the IMF has not contributed anything to this," he said.
Two or three ASEAN countries should have concluded their bilateral swap agreements by the time ASEAN Plus Three finance ministers gather for the Asian Development Bank meeting in May.
Analysts had initially dismissed the swap plan as a "paper tiger" unlikely to make much difference to Asian currency trading. They noted a long-existing patchwork of agreements has never been used, even despite the massive volatility in Asian foreign exchange markets during the past few years.
But government officials have started to back up their view that currency stability efforts in the "Chiang Mai Initiative" amount to more than pie-in-the-sky dreaming by providing some details of how the cooperation would work.
Supachai Panitchpakdi, said negotiations among ASEAN countries are proceeding well, and "at the end of the day, I'm quite hopeful we would have a full fledged Asian Monetary Fund."
Although that kind of comment has weakened Western support for the effort, on concern that Asia is ultimately attempting to circumvent the tough provisions of the International Monetary Fund, analysts agree that Asian governments seem intent on improving their ability to help themselves.
And a Japanese official said there is no cause for such concern that the IMF would be circumvented. "The trigger for implementing swaps will be largely linked to an IMF program," Takatoshi Ito, deputy vice minister for international affairs at the Japanese Ministry of Finance, wrote in the Financial Times just ahead of the ASEAN meeting.
An official of the Bank of Japan meanwhile suggested that once the political agreements are in place, the central bank will follow through. "We are looking for a good result," the international affairs official told Dow Jones Newswires as the ASEAN meeting got under way.
At the same time, the official said he is far from ready to dismiss cooperation efforts by countries with nearly half of the world's foreign exchange reserves. "It's not complete fantasy," he said.
For Southeast Asian countries in particular, he said, the market should recognize there could be legitimate times for one central bank to help another. He noted that the region's currencies these days fluctuate far more against the U.S. dollar, euro and yen than against each other, which is an intra-ASEAN stability they might want to defend.
The 10 ASEAN members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Philippines, Thailand and Vietnam. The ASEAN Plus Three summit also includes participation of China, Japan and South Korea.