US cautious about Chiang Mai Initiative

May 8, 2000

CHIANG MAI -- The United States yesterday expressed reservations about Asia's move to create a regional financing agreement, warning that it might discourage the promotion of crucial financial and economic adjustments in crisis-hit countries.

"We find this a fine idea. The nature of financial arrangements all depends on the details," said Edwin M Truman, the United States Treasury assistant secretary for international affairs.

"The essential point is that any regional financial arrangements have to be ones which provoke the timely adjustments of economic and financial policies. Financial arrangements can do that, but it is not always the case."

Truman, who attended the Asian Development Bank conference, was responding cautiously to a historic step on Saturday by Association of Southeast Asian Nations countries, China, Japan and South Korea 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 to include all Asean members so that they can draw on each other's foreign exchange reserves when faced with a liquidity crisis.

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

Exactly how much money will be involved or how the mechanism will be worked out remain unclear.

The Asean Secretariat has been assigned to study the modality and mechanism of this regional financing agreement. "Our concern is that there's no detail [in the regional financing agreement]. The devil is in the detail," said Truman. "If they're supportive of prompt economic and financial adjustment, then I think they are to be commended. But we don't know what will happen yet."

His comment reflects the long-standing US view that a regional financing facility might lead to a moral hazard, for countries hit by the crisis might not feel any urgency to undertake drastic policy adjustments knowing that they would eventually be bailed out by somebody else. Officials said informally that US and European representatives have expressed their doubts over the need for Asia to create the regional financial arrangement, fearing that it might undermine the present makeup of the global financial architecture dominated by the International Monetary Fund and the World Bank.

Finance ministers from Asia were careful not to give the impression that they were laying a foundation for a new regional financial architecture that would eventually develop into a Asian Monetary Fund or rival the IMF.

They emphasised that they were simply at an initial stage in trying to strengthen regional financial collaboration in order to protect Asia from the next crisis.

Their joint statement clearly said: "In order to strengthen our self-help and support mechanisms in East Asia through the Asean plus three framework, we recognised a need to establish a regional financing arrangement to supplement the existing international facilities."

Kunio Saito, director of the IMF's Regional Office for Asia and the Pacific, said Asia is moving in the right direction in trying to create a regional financial arrangement to safeguard financial stability.

"I welcome the comments made by the finance ministers here to develop closer collaboration with the IMF," he said. "Once in place, this will be good for the regional financial system and if it's good for the regional financial system, it's good for the global financial system."

Nonetheless, Saito cautioned that Asia should not strive to create another agency to handle the regional financing agreement, which can be conducted through bilateral networks.

"I don't think the region needs another bureaucracy," Saito said. Japanese Finance Minister Kiichi Miyazawa made it clear that the regional financing agreement would develop into a new financial architecture for the region. "It's something that will evolve naturally," he said yesterday. "Already a part [of the regional financing agreement] already exists.

"The bilateral swap and repurchase agreements are seen as fit and convenient. Japan is always ready to make itself available for further consultation on this matter," he added.

Smaller and economically less developed Asean countries might not be able to participate in the initial phase of the financing agreement.

Panom Lathouly, deputy director of Bank of Lao PDR's economic research department, told The Nation yesterday that Laos "in principle supports" the regional currency swap mechanism, but the timing of its involvement is unclear.

"We [Laos] might not be able to participate immediately. We need more time. We want first to look at the studies of the Asean Secretariat," said Panom.

Asean, China, Japan and South Korea agreed on Saturday to expand the existing Asean currency swap mechanism to include the remaining Asean members and the three East Asian countries.

For the time being, only the five original Asean countries are signatories to the Asean financial swap agreement that has been in effect since 1977. Each has put in US$40 million (Bt1.5 billion). They have in recent years urged Brunei, one of the richest countries in the world, to join the mechanism.

BY THANONG KHANTHONG and YINDEE LERTCHAROENCHOKE