ASEAN+3 swaps lack muscle as a safety net

ASEAN+3 swaps lack muscle as a safety net

NEW DELHI (Reuters): Doubts ASEAN+3 can build a big enough financial war chest for a swap scheme to support currencies in crisis are fueling skepticism about how well the safety net will work, analysts and traders said.

Lenders in the program appeared cautious and ASEAN was showing signs of disunity, currency dealers attending the Asia Pacific Forex Congress in New Delhi said.

In addition, there was no clear idea how big the war chest would be so that the foreign exchange market can assess ASEAN's spending power in times of crisis.

"The swap agreement's usefulness as a mechanism to prevent speculative attacks on Asian currencies may turn out to be limited," Ken-Ichi Takayasu, senior economist for Sakura Institute of Research said from Tokyo.

A framework for a web of bilateral currency swaps linking 13 Asian central banks was unveiled last month, following an agreement among 10 member nations of the Association of Southeast Asian Nations (ASEAN) plus Japan, China and South Korea at a meeting in Singapore.

The idea of the swaps is to make foreign reserves, mainly dollars, available at short notice to a member of the group whose currency comes under sudden speculative attack, as happened to the Thai baht in 1997.

In order for the ASEAN+3 swap scheme to be effective in preventing another financial crisis, dealers say the war chest would have to be big, and that its ability to disburse funds quickly must be unquestioned.

"There can't be any sign of internal squabbling," Congress attendee Nao Nakajima, Japan treasurer for Standard & Chartered Bank, said.

Indonesian President Abdurrahman Wahid's accusation against Singapore last month, that it was taking advantage of Indonesia's troubles and cared about only profits, showed that there were seeds of dissension among ASEAN countries.

And there are unanswered questions regarding size.

Officials for Japan's Finance Ministry have said that ASEAN+3 governments have yet to negotiate the size of each swap line, and say that there is no way to tell now how large a swap line each country would have access to when all negotiations are finished.

"It would have been better if they had announced the planned size of the swap lines," Nakajima said.

Analysts say that ideally, the credit line which can be extended at one time needs to be around $50 billion to $100 billion, or at least about half the $125.3 billion disbursed by the IMF, World Bank and Asia Development Bank among others, to Indonesia, Korea and Thailand combined during the Asian crisis.

But with Japan, the world's number two economy, taking a cautious stance toward committing funds as it wrestles with the task of bringing its surging government debt under control, analysts are skeptical that the swap lines would become that large.

The ASEAN+3 swaps agreement was signed when the currencies of many Asian currencies are coming under selling pressure, reviving concerns of another regional crisis.

"The 1997 crisis was like a bomb which went off all of a sudden, without any warning," said Standard & Chartered's Nakajima.

"The situation now is more similar to the ignition of a long fuse. Everyone is watching, worried there may be another bomb at the end of the fuse," said Nakajima.

The Thai baht recently fell to its lowest level against the dollar since March 1998, prompting the Bank of Thailand to begin strict enforcement of a ban on off-shore speculative short selling of the baht.

Among others, the Philippine peso fell to a life low last month, the Korean won hit a 13-month low on Friday and the Indonesian rupiah was down 27 percent this year.

One positive sign in the region, currency dealers say, is that the 1997 experience has helped make Asia better prepared to cope with falls in regional currencies.

Standard & Chartered's Nakajima said Asian companies with dollar denominated debt are more likely now to be hedged against currency risk. This lessens the chances of a recurrence of the type of panic-buying of dollars by unhedged corporates which helped trigger the 1997 crisis, he said.

ASEAN links Indonesia, Malaysia, Singapore, Brunei, the Philippines, Thailand, Cambodia, Vietnam and Myanmar.