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.