Currency swap calls for $20bn support

May 4, 2000

SOME US$20 billion to US$40 billion will be needed to support the formation of a regional currency swap arrangement which will be discussed by top finance officials at the upcoming Asian Development Bank meeting in Chiang Mai, said Eisuke Sakakibara, the former vice minister/international affairs of the Japanese Finance Ministry.

However, the officials will be talking about an initial size of US$200 million, which is barely enough to forestall the next financial crisis.

Speaking yesterday at a special conference organised by the Nation Multimedia Group, Sakakibara, generally known as Mr Yen, said Asia is moving towards the right decision in forming a regional currency swap arrangement to support currencies in the region in time of crisis.

"At least, it is a good start," he said. Sakakibara added that he understood that the Thai government is also taking a leadership role in creating the currency swap arrangement which will encompass broader participation among the key economies in the region.

For the first time ever, finance ministers from Association of Southeast Asian Nations will be meeting their counterparts from China, Korea and Japan in the corridors of the ADB conference to discuss the possibility of forming a regional currency swap arrangement.

This measure is seen as a self-defence mechanism in the event of the threat of another financial crisis. A regional currency swap arrangement would allow member countries to intervene in foreign exchange markets to stabilise their currencies if a crisis breaks out.

Asian countries have learnt from past mistakes that with the imperfect international financial system, they have to rely on their own regional cooperation to forestall the next crisis. In a way, the Asia crisis could have been prevented or the damages could have been alleviated if there were a lender of last resort.

After the crisis broke out in 1997 with the baht devaluation, the International Monetary Fund, the World Bank or the G7 countries were reluctant to act as the lender of last resort in the face of panicky capital outflow from Thailand, Indonesia and South Korea.

Without a global central bank acting as lender of last resort, Japan floated the idea of an Asian Monetary Fund in August 1997. Sakakibara himself was playing an active role behind this drive to create a regional central bank, which would provided liquidity support to crisis-hit countries.

The size of the fund was then put at US$100 billion. The money would come from contribution of the central banks in the region, which should put half of their foreign exchange reserves into this regional fund.

"If Japan, China, Hong Kong, Korea and Southeast Asian countries provide, say, half of their reserves to the fund with specific arrangements for its activation, it should serve as an effective regional lender of last resort for the next liquidity crisis," Sakakibara said.

However, by October and November the same year, the Asian Monetary Fund was shot down by the United States and Europe which were afraid that the fund would supersede the IMF and create a moral hazard among the member countries. During the crisis, The US and Europe also failed to provide direct liquidity support to Thailand and other crisis-hit countries, believing that the crisis would not develop into a global financial turbulence.

However, Sakakibara argued that if the Asian Monetary Fund is to be narrowly defined as a source of provision of liquidity in time of crisis with specific formula for private sector participation, it could complement the existing function of the IMF.