Currency plan moves ahead

04/05/2009 | Anthony Rowley, Steve Garton

Asian finance ministers yesterday took the first steps towards what could become an Asian monetary fund by agreeing to enlarge and multilateralize the Chiang Mai Initiative, a system of currency swaps

Asian finance ministers yesterday took the first steps towards what could become an Asian monetary fund by agreeing to enlarge and multilateralize the Chiang Mai Initiative, a system of currency swaps.
Asean+3 ministers approved “all the main components” of the facility, set to be operational by the end of this year, the group’s chairman, Thai finance minister Korn Chatikavanji, said.
The facility, now known as the Chiang Mai Initiative Multilateralized (CMIM), is described as a “framework of mutual assistance among Asean+3 countries” with the “core objectives of addressing short-term liquidity difficulties in the region and supplementing existing international financial arrangements” – principally the IMF.
The 13 ministers’ agreement – on their countries’ individual contributions to the quasi Asian monetary fund, and on establishing a regional surveillance unit to be operated initially by the ADB and the Jakarta-based Asean Secretariat – marks a significant breakthrough in regional cooperation in the face of the global financial crisis, officials said.
Japan separately announced its intention to provide up to $60 billion of bilateral currency swap facilities to Asian borrowers yesterday. Japanese finance minister Kaoru Yosano said that this does not conflict with the CMIM, which he described as a “tool to supplement the IMF,” because regional funding needs are considerable.
The size of the CMIM, first established more than a decade ago by the Asean+3 group as a network of bilateral currency swaps, will be increased from $80 billion to $120 billion. Japan and China will each contribute $38.4 billion, with Hong Kong contributing $4.2 billion of China’s share. South Korea will contribute $19.2 billion and the ten Asean states will make up the remainder.
Although agreement to enlarge and multilateralize the CMI was reached several years ago, implementation has been bogged down by disagreement over where the economic monitoring should be located as well as problems over legal provisions of operating a multilateral fund.
The monitoring issue has been solved by agreeing that the ADB and the Asean Secretariat should jointly operate the CMIM’s surveillance function on an “interim basis”, while ministerial deputies work out where the unit should be established permanently, Singapore finance minister Tharman Shanmugaratnam said after the meeting.
The deputies will also be left “work out the operation details, particularly legal documents governing the CMIM, which will now be governed by a “single contractual agreement”, according to a communique from yesterday meeting.
The new CMIM will supplement the IMF’s lending function: only 20% of any loans it disburses will be made available to any borrowing country that does not have a programme with the IMF. Potential problems could have arisen from the IMF’s practice of making effectively unconditional loans to borrowing countries with good histories of economic management – but decisions on the conditionalities attached to CMI loans will hinge largely on the IMF’s assessment of the borrower’s record and economic situation, at least initially, Tharman indicated.
The Asean +3 ministers also endorsed a $500 million “trust fund” to promote the development of Asia’s local currency bond markets, and agreed that the initial capital would be expanded once it was used up. The credit guarantee and investment mechanism, which will be run by the ADB, will provide guarantees for local currency bonds sold by companies in the Asean region, helping them access capital.
Details of the scheme have yet to be worked out, but it is to be fully operational by next year’s Asean+3 meeting in Uzbekistan.

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