Asian leaders join to protect region’s finances

May 7, 2000

CHIANG MAI – Finance ministers from Asia yesterday reached an historic agreement to strengthen the regional financial architecture, redesigned to guard the region from currency attacks.

The agreement, dubbed the Chiang Mai Initiative, calls for an expansion of the existing Asean Swap Agreement that would include all Association of Southeast Asian Nations members.

It will also involve a network of bilateral swap and repurchase agreement facilities among the Asean countries, China, Japan and South Korea.

This agreement – the details of which will be studied by the Asean Secretariat – represents a preventive measure by the Asian countries to cope with the growing volatility of global financial markets and possible currency attacks.

The finance ministers from Asean, China, Japan and South Korea reached their agreement on the sidelines of the Asian Development Bank meeting.

But the finance ministers were quick to assert that they were not, as yet, setting their sights on creating the Asian Monetary Fund as widely speculated, nor were they trying to launch a regional financing arrangement that would supersede the existing international facilities.

“This Chiang Mai Initiative is to strengthen the existing cooperation framework that we have agreed to,” said Kiichi Miyazawa, the Japanese finance minister.

He added that there was not any discussion on the Asian Monetary Fund.

Mustapa Mohamed, the Malaysian finance minister, added: “It can evolve into something big. But there was not discussion of what it was going to be.”

Under the agreement, the Asean Swap Arrangement, formed in 1977, will be augmented to include all 10 members of Asean.

Now the arrangement covers only five countries – Thailand, Singapore, Malaysia, Indonesia and the Philippines.

Next, the initiative will expand to cover a network of bilateral swap and repurchase agreement facilities among Asean, as well as China, Japan and South Korea.

The currency swap arrangement, in time of liquidity crisis, will allow member countries to borrow US dollars from each other’s foreign exchange reserves against their local currencies.

But this will also accompany a forward purchase of the local currencies in return for handing over the US dollars back to the contractual party.

The size of the present Asean Swap Arrangement is only US$200 million, with each of the five founding members contributing $40 million.

The finance ministers from Asia said they did not discuss how much money they would add to the arrangement, nor did they go into details of how a network of bilateral swap and repurchase agreement facilities might be worked out.

“No amount of money was discussed in the joint initiative because future implementation depends on further study on the modality and mechanism by the Asean Secretariat,” said Tarrin.

“Our government is in support of such initiative because it contributes to financial and economic stability to this region,” added Xiang Huaicheng, the Chinese finance minister.