Asian countries move closer to currency safety net
Asian countries move closer to currency safety net
HONOLULU, Hawaii (Reuters): Asia's top economic policy makers kicked off a three-day meeting in Hawaii on Wednesday with the announcement of fresh progress in stitching together a currency safety net to guard against a repeat of the 1997/98 regional crisis.
On the sidelines of the Asian Development Bank annual meeting in Honolulu, Japan announced it had struck a $3 billion currency swap deal with Thailand, a $2 billion agreement with South Korea and a $1 billion swap facility with Malaysia.
The deals are a step towards a network of currency swaps linking the foreign reserves of the 10 Association of Southeast Asian Nations (ASEAN) nations with Japan, China and South Korea.
"We will not be caught by surprise this time," said Malaysian Finance Minister Daim Zainuddin. "We are ready to face any eventuality."
The agreements supplement a $1 billion swap fund among ASEAN members. Leading ASEAN countries are expected to strike further bilateral swap deals with their three big northeastern neighbors to strengthen the safety net.
Japan said it was holding talks with the Philippines and China on similar deals, and South Korea said negotiations with China and Thailand were in the final stage, although more time was needed.
The three deals were announced after ADB said fears of a new Asian crisis were exaggerated, despite the global slowdown.
"We believe that the downside risks are manageable and fears of a new regional crisis seem exaggerated," ADB President Tadao Chino told the opening session of the annual meeting.
"Drawing upon the severe lessons of the financial crisis, Asian economies have become much more resilient to external shocks ... with more flexible exchange rate systems, increased foreign exchange reserves, reduced short-term external debt and a demonstrated commitment to ongoing reforms."
Ministers said the terms and conditions of the currency swap deals already agreed would be kept confidential.
Japanese officials have said the initial term of any swap deal would be three months and it could be renewed seven times.
The interest rate would be set at LIBOR (London Interbank Offered Rate) plus a risk premium of 150 basis points for the first drawing and first renewal, with an additional 50 basis points added for every two subsequent renewals.
Japan's new swap agreements will be in addition to a $2.5 billion swap deal with Malaysia and $5 billion pact with South Korea that were set as part of $30 billion Miyazawa Initiative launched in the wake of the Asian crisis.
Analysts say the so-called "ASEAN+3" swap network remains largely symbolic at this stage, as the web of deals would have to total at least $50 billion to be a credible defense against speculative currency attacks.
But some see the plan as an early step to building an Asian Monetary Fund as an alternative to existing financial institutions -- a prospect that makes many Western nations uneasy.
U.S. Treasury Secretary Paul O'Neill said he had no objections to the swap scheme, however.
"As long as arrangements people are making bilaterally and multilaterally expand the possibility of raising the standard of the people... and not at the expense of someone else, I don't think why we would be against anything that would move us to that kind of objective," he said.
Malaysia, which dealt with the crisis without IMF help, had strongly resisted any IMF role in the currency swap plan.
But Japan insisted that while 10 percent of each swap line could be disbursed to deal with a short-term liquidity crunch, the remaining 90 percent should only be activated in tandem with IMF-supervised reforms.
Malaysia said last month it would bow to the majority view, and its deal with Japan represents a breakthrough in the currency swap project, first announced at the previous ADB meeting in Chiang Mai, Thailand, last year.
Malaysia said it had backed down to ensure that the scheme could move forward and help other ASEAN countries.
"ASEAN works very closely as a scheme, and we would want this financing to be given to others," Daim said. Given Malaysia's aversion to the IMF, it is unlikely the country would ever make full use of the swap deal.
In an apparent concession to Malaysia, however, the ASEAN+3 bloc agreed to review the terms of the scheme in three years.