Asian agreement pits region's clout against speculators

May 8, 2000

Thanong Khanthong explains how Asian nations are trying to create a "financial firewall" through a densely operating web of bilateral agreements to guard financial stability.

The regional financing agreement, reached over the weekend by the finance ministers from the Association of Southeast Asian Nations (Asean), China, Japan and South Korea, will be designed as a densely operating network of bilateral swap and repurchase agreements that would shield the region from currency attacks.

The spirit of this regional financing collaboration is to deter speculative attacks against regional currencies, amid growing financial turbulence. A Thai official, who is familiar with the architecture of the regional financing agreement, said: "It will be a preventive measure rather than curative. For when countries in the region put their financial clout together, the currency speculators would have to think twice before launching attacks."

The are two steps involved in the creation of the regional financing agreement. The first is to augment the participants in the Asean Swap Arrangement, formed in 1977. Presently, only Thailand, Malaysia, Singapore, Indonesia and the Philippines are members of this arrangement, with each making available US$40 million (Bt 1.5 billion) from their foreign exchange reserves for others to borrow in times of liquidity crisis. Over the weekend, the Asean finance ministers plus their three counterparts from Northeast Asia agreed to expand the participation in the Asean Swap Arrangement of Brunei, with Vietnam, Laos, Cambodia and Burma to follow suit.

The second step is to have China, Japan and South Korea forming bilateral currency swap or repurchase arrangements with each individual Asean member in a web of defensive mechanisms against speculative attacks from outside the region. Under the currency swap arrangements, a member country in need of liquidity may borrow US dollars from the reserves of another member by handing over its local currency. This will be accompanied by a forward purchase of the local currency using the US dollar. In the repurchase agreement, on the other hand, a member country can borrow the US dollar to relieve their liquidity problems by placing government bonds, normally the US Treasuries, as collateral.

In effect, in the 10-plus-three formula of the regional financing arrangement, Japan will establish bilateral currency swap and repurchase agreements with 12 other members within the framework. So will China and South Korea in the same fashion. Within the Asean group, similar bilateral arrangements will be made between members, as well as with the three regional powers. This will create a huge web, or "financial wall" as one official describes it, to shield the region from currency attacks.

The amount of money involved in the bilateral swap and repurchase agreements is still to be worked out, but there are already several bilateral agreements between the countries in the region. Altogether, the central banks in these 13 countries have a combined $700 billion in foreign exchange reserves, huge enough to guard financial stability in times of need.

Thai Finance Minister Tarrin Nimmanahaeminda has emerged as the architect of this regional financing agreement, which will augment the existing Asean Swap Arrangement and bring the regional powers -- China, Japan, South Korea -- into play. Officials said he had made a number of visits to Japan to discuss the framework with Japanese Finance Minister Kiichi Miyazawa, who has been very enthusiastic about Asia's effort to create its own lender of last resort. The Asian leaders have realised that they have no one but themselves to rely on when it comes to the next financial crisis. The nature of the financial crisis is contagion -- once it hits one country, it spreads to neighbouring countries, as evidenced by the 1997-98 Asian crisis.

Whether these bilateral swap and repurchase agreements will evolve into an Asian Monetary Fund remains to be seen. But Kuino Saito, director of the International Monetary Fund's Regional Office for Asia and the Pacific, warned that Asia should not create another bureaucracy to handle this arrangement, which should also supplement the existing international financing facilities.

In the present arrangement, central banks in Asean appoint one of their members as an agent to handle the swap transactions, so that there is no need to set up an independent institution like the Bank for International Settlements. The Basel-based institution, dubbed the central bank of central banks, now processes the swap transactions for the member central banks.

However, the regional leaders have agreed to further cooperation in economics research, technical assistance, financing agreement and surveillance to prevent another crisis from hitting the region. These four key functions are similar to the mandate of the IMF. If these four functions are institutionalised over time, that will be a final make-up of the Asian Monetary Fund.

Japan has made known that it would like to set up the Asian Monetary Fund, as pointed out by Eisuke Sakakibara, the former powerful vice minister of Japan's Finance Ministry, in his addresses in Bangkok and Chiang Mai over the past week. The theory is that in the absence of a global lender of last resort, Asia needs a regional lender of last resort to guard financial stability.

During the Asian crisis, the IMF, the World Bank and the G-7countries were reluctant to act as a lender of last resort for Asia. In this respect, the Asian Monetary Fund is the answer to the imperfect global financial architecture, although geopolitics, as Hubert Neiss, the former senior official of the IMF warned, might eventually make it extremely difficult for it to come into being.