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.