Asia fund no cure for forex instability: Analysts

Asia fund no cure for forex instability: Analysts

TOKYO (Reuter): A proposed rescue fund to deal with Asian currency crises could provide a psychological weapon against speculators, but it would not solve the region's foreign exchange problems, analysts and currency dealers say.

"A rescue fund in Asia may have a psychological impact on speculators, but it should not be considered the solution to instability in the region," said Hisao Matsuura, an analyst in the Asian/Oceania research section at Nikko Research Center.

"The argument should not be focused only on (speculative) funds. It is more important for each nation to form a monetary policy, under the guidance of the IMF or the Asian Development Bank, which is solid enough to prevent crises," he said.

Matsuura pointed out that, during the Thai crisis, the baht was attacked by speculators when the Thai central bank intervened to defend its currency.

"As we saw when the baht was beaten down despite rounds of intervention during the crisis, I think such a fund may not be enough to stabilize currencies in times of turmoil," he said.

Last month, Asian-Pacific donors hammered out a US$17.2 billion IMF-led rescue package for Thailand, including $4 billion each from Japan and the IMF.

The idea of an emergency fund to address financial crises in the region, such as the recent turmoil in Thailand, was raised during the annual World Bank/IMF meeting this week, although no decision was reached.

IMF Managing Director Michel Camdessus told reporters at the end of the meeting on Thursday that there was a need for further debate on the Asia fund proposal. The IMF, Southeast Asian countries and others are due to discuss the issue in Tokyo in December.

"The scale of the fund and terms will be very important, but the key to success will depend highly on how the fund can work together with the IMF's system," said a senior Asian currency dealer at a major Japanese bank.

"Many Asian nations are already committed to a bilateral repo agreement so I don't feel there is an immediate need to form an Asian version of the IMF," the dealer said.

Meanwhile, others said that there is a need to set up a rescue facility by Asian nations as IMF loans were always linked to strict conditions on spending, monetary targets and overall economic performance.

But there are many hurdles that need to be cleared before finalizing a system in Asia.

Japanese Finance Minister Hiroshi Mitsuzuka told reporters on Wednesday that Asian nations would continue discussions on the idea of an Asian fund to deal with currency fluctuations.

But Mitsuzuka added that such a fund should not "compete" with the IMF and should instead be "supplementary".

"Listening to Mr Mitsuzuka's comments, we may be able to see the establishment of a fund rather soon," said Fumiyuki Sasaki, an economist at Nomura Research Institute.

"Although we know that currency intervention can only smooth the operation (of the market), it may work effectively considering the size of the Asian market, which is small by global standards," Sasaki said. "On such a scale, it could work effectively."