Tokyo and Manila agree on US$3 billion swap deal

Tokyo and Manila agree on US$3 billion swap deal

TOKYO (Reuters): Japan and the Philippines have reached a
basic agreement to set up a dollar-peso swap facility as part of
an Asia-wide currency safety net to fend off future financial
crises, officials said on Friday.

Philippine central bank officials said their policy-making
Monetary Board approved a currency swap deal with Japan at its
weekly meeting on Thursday.

In Manila, Deputy Governor Amando Tetangco told Reuters: "Yes,
approved by the Monetary Board, amount to be discussed."

A Japanese government source told Reuters the formal offer
letter has yet to be exchanged. "The amount is expected to be
around US$3.0 billion," the source said.

The deal could give fresh impetus to the painstaking process
of creating a regional currency safety net, known as the Chiang
Mai Initiative (CMI), which analysts regard as laying the
foundation for a permanent monetary fund in Asia.

The Tokyo-led initiative aims to avert a repeat of Asia's
1997-98 financial crisis by linking international reserves of the
10-member Association of South East Asian Nations (ASEAN) with
those of Japan, South Korea and China.

Before the Philippines-Japan deal, Japan had agreed to set up
a $3.0 billion currency swap deal with Thailand, a $2.0 billion
pact with South Korea and a $1.0 billion swap facility with
Malaysia.

While Manila has been keen to set up the swap scheme with
Japan since negotiations started in March, it took time to nail
down technical details.

Japanese Finance Ministry officials have said this was because
in the Philippines, the central bank, which has jurisdiction over
international reserves, has a stronger sense of independence from
the government than in other Asian nations.

Under the CMI framework, the initial term of a swap deal will
be three months and can be renewed seven times, officials said.

The interest rate would be set at dollar LIBOR (the 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.

The initiative ties disbursements under the scheme to reforms
supervised by the International Monetary Fund. In cases in which
member countries are deemed to have a temporary liquidity crunch,
they can borrow up to 10 percent of the swap line without a link
to the IMF program.

Japan has also been holding talks with China on a yen-yuan
currency swap deal. But the process has been slow because of the
many decision-making stages in China, Japanese officials said.

That scheme will be mostly symbolic because neither Japan nor
China are expected to see short-term liquidity or balance of
payment crises. In addition, Japan is unlikely to need yuan in
the near future, Japanese officials said.

It was China's choice to prepare for a yen-yuan scheme because
Beijing already has enough dollar-denominated foreign reserves,
they added.

China's participation is important for regional cooperation
after Beijing relaxed its opposition to a Japanese call in 1997
for an Asian Monetary Fund, an idea fiercely opposed by the
United States.

While there are fears an ongoing trade row between Japan and
China over import curbs could delay swap talks, Japan's top
financial diplomat, Haruhiko Kuroda, told Reuters in a recent
interview that CMI and the trade spat were separate issues.

Despite recent agreements on swap deals, the ambitious plan to
establish a regional network is still at an early stage.

China, South Korea, and Thailand are currently holding talks
with each other, but most ASEAN countries have been taking a back
seat despite recent volatility in their financial markets.