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.