Experts urge East Asia to pool huge reserves

Experts urge East Asia to pool huge reserves

P. Parameswaran, Agence France-Presse, Manila

Southeast Asia and China, Japan and South Korea should set up
a common fund from their huge foreign reserves as part of a
strategy against regional financial turmoil, said a group of
experts.

In one of the most comprehensive studies on East Asia's
biggest financial turmoil six years ago, the experts also said
the region must pool its resources in dealing with financial
sector reforms and move towards greater exchange rate policy
coordination.

The Manila-based Asian Development Bank (ADB) commissioned the
study by 23 economists and policymakers from the United States,
Japan, Australia, France, Thailand, South Korea, Switzerland and
Luxembourg.

"This study is timely because East Asia has reached a critical
juncture in its initiatives at regional monetary and financial
cooperation," Yoshihiro Iwasaki, head of the ADB's regional
economic monitoring unit, told AFP.

After the 1997-98 financial crisis plunged the region into
recession, East Asian countries agreed to strengthen regional
monetary and financial cooperation in a bid to prevent future
turmoil.

They consulted regularly on financial policies, built up
macro-economic and financial monitoring mechanisms, launched a
regional bond market and set up a network of bilateral currency
swap and repurchase agreements.

These should now be strengthened with "strong political will"
into a fully-fledged regional monetary and financial cooperation
framework, Iwasaki said.

For instance, the study wants the region's US$33 billion
network of 13 bilateral currency swap arrangements expanded into
a centralized, multi-laterally run operation.

China, Japan and South Korea now have swap agreements with
individual Southeast Asian nations in which each party can ask
the other for an agreed amount of funds when faced with crisis.

However, the bilateral swaps are relatively small compared
with member countries' foreign exchange reserves as well as the
resources to which these countries have through the International
Monetary Fund (IMF), Iwasaki said.

For example, Thailand's arrangements with China, Japan and
South Korea allow it to draw only about $7 billion, substantially
lower than the $17.2 billion it sought from the IMF during the
1997 financial meltdown.

"There is considerable merit in expanding the size of
resources available," Iwasaki said.

He urged East Asia to initially earmark a certain percentage
of the countries' foreign exchange reserves for swaps before
eventually considering a centralized pool.

Setting up a centralized reserve fund with a mandate for
crisis prevention and crisis management could set the pace, as
proposed by the study, for a common basket pegging of regional
currencies and ultimately, adoption of a single regional
currency, he said.

East Asia has also been asked to deepen its bond markets to
tap on the region's huge savings during future crises.

These savings run up to more than $1 trillion in developing
Asian nations but are largely locked up in banks.

"Learning from the Asian crisis, it is necessary to reduce
this undue reliance on banks for financial inter-mediation as a
predominantly bank-based financial sector tends to be prone to
systemic crises more than a capital market-based financial
sector," Iwasaki said.

He urged the region to "expeditiously implement" its
unprecedented "Asian Bond Market Initiatives," which include
promoting cross-border bond issues involving the 10 Southeast
Asian nations and their three key East Asian partners.