Asia courted with ‘insurance’ deal

07/10/2010 | Anthony Rowley

IMF efforts to win back Asian nations will continue as it seeks to persuade them to take out “insurance” in the form of expanded IMF facilities, rather than holding foreign exchange reserves, Fund deputy managing director Naoyuki Shinohara has said

IMF efforts to win back Asian nations will continue as it seek to persuade them to take out “insurance” in the form of expanded IMF facilities, rather than holding foreign exchange reserves, Fund deputy managing director Naoyuki Shinohara has said.

Part of those reserves may also help bolster the IMF’s own resources, Shinohara suggested in an interview with Emerging Markets yesterday.

The recent meeting at Daejeon, South Korea, organised jointly by the IMF and the Korean government, was widely seen as the start of a “charm offensive” to woo Asian countries that have regarded the Fund with suspicion since the 1997 Asian financial crisis.

But Daejeon was “just one step,” Shinohara said. “In itself it did not represent huge progress.”

In in terms of improving communication between the IMF and an estranged Asia, “it was a significant event, however”, Shihohara, a former senior official and vice minister at the Japanese Ministry of Finance, said.

Meetings in other East Asian countries, invitations to their officials and staff consultations there are also being expedited. The Fund’s staff presence is also being increased in Asian countries, many of whom came cap-in-hand to the Fund in 1999, but now represent wealthy potential creditors.

At Daejeon, the Fund sought to convey to Asian nations that there was no longer any need for them to hold large volumes of foreign exchange reserves as self-insurance against a future crisis.

Instead, they could take out insurance in the form of new or expanded IMF facilities, which would provide them with foreign currency reserves with virtually no strings attached, in contrast to the often harsh conditionality that accompanied IMF loans post-1997.

These instruments include the Flexible Credit Line (FCL) which allows countries with a strong track record on economic management to borrow virtually condition-free and the Precautionary Credit Line (PCL) which applies to countries without such strong credentials.

A Global Stability Mechanism (GSM) which would provide short-term liquidity support on a multilateral basis for dealing with systemic risks, is also under consideration.

Shinohara acknowledged to Emerging Markets that there is still “some stigma” attached to having to go to the IMF for help, in the eyes of certain Asian countries.

“But holding a huge amount of reserves costs a lot,” he argued. Asian countries could in future “rely less on reserve accumulation and look to regional as well as global insurance. Mexico is doing that by using the FCL, and also Poland. So why not also some of the Asian countries?”

Shinohara noted that “Asia is doing well at this moment, and I don’t think that they feel the threat of contagion. But there may be cases in the future that change this perception. The IMF should be ready to provide a safety net to these countries.”

Asia’s roughly $5 trillion of aggregate foreign exchange reserves are also seen as a potential source of extra resources for the IMF. “Many Asian countries are already creditors of the IMF so any further provision would be welcome,” Shinohara added.

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