Asia can fight off speculators without its own 'IMF'

Asia can fight off speculators without its own 'IMF'

Andy Mukherjee, Blomberg, Tokyo

Indonesian authorities might have hoped for a salutary effect
on the rupiah when they announced their plan to seek US$6 billion
in standby funds from Japan to bolster the country's depleting
foreign reserves.

Just the opposite happened.

After details of the rupiah-dollar swap agreement became
public knowledge early last week and before the Aug. 31 signing
of the accord between Bank Indonesia and Bank of Japan in Tokyo,
the Indonesian currency slumped to a four-year low.

That's how little respect the market has for the "Chiang Mai
Initiative," a homegrown Asian mechanism that was born when the
countries of Southeast Asia and their bigger North Asian
neighbors -- Japan, China and South Korea -- came together to
help each other fight off currency crises.

This is how the Chiang Mai Initiative is supposed to work: A
country such as Indonesia, facing a speculative attack on its
currency, borrows dollars from another country -- say, Japan --
and uses them to buy its own currency and shore up its value.

Including the recent $6 billion commitment by the Bank of
Japan to swap rupiah against dollars, the size of the war chest
is a tiny $52.5 billion.

The amount is small, and not just in relation to the $2.56
trillion foreign reserves held in Asia. During a contagion, like
the region suffered in 1997-1998, the International Monetary Fund
(IMF) and other lenders had to put up $119 billion to contain the
speculative runs on Asian currencies.

The $52.5 billion kitty is inadequate for bailing out even a
single country. That's because the initiative agreed upon in 2000
in Chiang Mai, a resort town in northern Thailand, is a cocktail
of 17 deals, each between two countries. Indonesia's share works
out to just $8 billion because it has, besides the arrangement
with Japan, two other credit lines: $1 billion each from China
and South Korea.

The second weakness is that the money, a 90-day credit
facility to be renewed if required, isn't to be given in full
when it's needed the most. Until the member countries agreed in
May this year to raise the limit to 20 percent, only 10 percent
of any allocation was to be made available on demand.

The disbursal of the rest is contingent upon the crisis-hit
nation entering an IMF program and accepting the loan conditions
that come with it. That pretty much rules out Chiang Mai funds
for a country that wants to avoid going to the IMF.

Governments resent IMF conditions. Much as national
authorities want help to prevent a collapse of their currency,
they often find the lender's demands to be politically unfeasible
and economically unbearable.

Right at the beginning of the Asian crisis, Japan had proposed
a full-fledged Asian Monetary Fund, an idea that was shelved
because of strong objections by the U.S. Treasury and the IMF.
The Chiang Mai Initiative was born as a compromise.

It's clear that for Chiang Mai to become a true crisis-
fighter, it must become a large common pool that's able to
provide real help to any member country that may need it, when it
needs it, while keeping lenders' interests secure.

At a meeting of Asian finance ministers in Istanbul in May
this year, there was an agreement on simultaneously activating
all swaps for any country through collective decision-making.

The ministers also resolved to establish a system for early
detection and speedy resolution of irregularities that may
precipitate a crisis. Is it possible to do all this without a
powerful agency? Who would tell Indonesia to tighten its monetary
policy? Wouldn't the creation of such a body amount to the
revival of the Asian Monetary Fund idea? Not necessarily.

The surveillance mechanism could be modeled along the system
that the Group of Seven industrial nations have created for their
own economies.

As for emergency funding during currency crises, a model
exists, albeit on a much smaller scale, in the form of the Latin
American Reserve Fund, set up by Bolivia, Colombia, Ecuador,
Venezuela, Peru and Costa Rica.

Member countries that have borrowed from this fund to tackle
balance-of-payment problems have promptly repaid their loans even
when they have suspended payments to other creditors. As a
result, FLAR, as the fund is called, has a higher credit rating
than its members, a United Nations report noted in July.

To be sure, a financial institution that works well for 97
million people in Latin America may not serve 2 billion Asians as
effectively. However, there are other solutions. One of them,
proposed by the Tokyo-based Institute for International Monetary
Affairs, is for each country to earmark a small part of their
foreign reserves for a region-wide crisis-prevention fund.

Meanwhile, long-awaited changes to the IMF's quota-based
governance will make it more representative of Asian interests.

The rationale for a unified regional response to speculative
attacks will remain, as recent events in Indonesia have so amply
demonstrated. However, with changes in the IMF, the case for an
Asian Monetary Fund will become weaker.