CRISIS PREVENTION: Strength in numbers

A doubling of the Chiang Mai Initiative Multilateralized – or CMIM – from $120 billion to $240 billion is set to be approved by finance ministers and central bankers from Asean+3 (Association of South-East Asian-Nations) countries when they meet in Manila. They are also expected to approve a precautionary credit facility for the CMIM and to delink further its lending from IMF rules.

It has been 12 years since the CMIM was created as a quasi-Asian monetary fund following the region’s currency crisis, but the facility has yet to be activated. Meanwhile, the IMF has sprung back to life over the past four years, faced with the global financial crisis – its total lending commitments have jumped from SDR144 billion ($222 billion) to SDR202 billion over the past two years alone.

The IMF has been highly active during the eurozone crisis and, with key Asian countries including China and Japan poised to approve a significant boost in their contributions to the Washington-based lender, the relevance of a regional monetary fund for Asia has once again been called into question.

One of the staunchest defenders of a regional fund is Eisuke Sakakibara, the man who first proposed the idea of an Asian monetary fund in 1997, during the World Bank annual meeting in Hong Kong, as contagion from the regional currency crisis was spreading across the region.

Sakakibara, then Japan’s vice finance minister for international affairs, was scathing in his criticism of the IMF for allegedly forcing countries needing balance of payments support to accept disastrous policy conditionality. “Since then, things may have improved within the IMF, but still I don’t think that its strong point is in Asia,” he says.

“The IMF has at times failed to cope with regional currency or monetary crises because it is centred on Europe,” he says. “Its strength is in Europe still – but it is relatively weak in terms of Latin American and Asian countries. So it has been useful to have a supplement to the IMF.

“East Asia’s economy is being integrated rapidly, centring around China and Japan. You need on-the-spot expertise for what is happening in this region. We need regional mechanisms, just as Europeans have a regional mechanism for monetary and exchange rate policies apart from the IMF. The IMF does have a role to play, but it needs to be supplemented by these regional arrangements.”

So can global and regional mechanisms work well together? “They should, and in Europe I see no major problems between the EU and the IMF,” he says.

SUSPICIONS

Some, like Sakakibara, remain suspicious of what they see as an IMF charm offensive. They say that in recent years, although the IMF has been able to repair its image in Asia and regain its credibility as a lender of last resort in times of crisis, Asian countries cannot afford to become hostage to Washington again.

“The CMIM is needed despite the fact that the IMF is increasing its financial capacity,” says Masahiro Kawai, a former regional chief economist at the World Bank and one-time Japanese finance ministry official who now heads the Asian Development Bank Institute in Tokyo. “Many Asian countries still do not want to go to the IMF in the case of crisis or even for precautionary arrangements,” he says.

“Some alternative arrangement is needed other than the IMF. One option would be to use bilateral currency swap arrangements, particularly vis-à-vis the US Federal Reserve, just as South Korea did in 2008. At that time Korea had a mini-currency crisis, and by borrowing money from the Fed, it was able to calm the foreign exchange markets immediately.”

The problem, says Kawai, “is that not all Asian emerging economies have access to the Fed’s currency swap arrangements. The Fed wants to lend only to countries that are considered to be safe.” Japan and China have also provided currency swaps to Korea, but again the number of countries eligible for such help is limited.

“That’s why the CMIM is still needed,” he adds, “and why strengthening it is a useful thing to do, by expanding its size and introducing some precautionary or crisis prevention arrangement to be activated, not after a crisis takes place but before it occurs.

“Also, further delinking of the CMIM vis-à-vis an IMF programme would be useful because that would give more incentive for countries to use the Chiang Mai Initiative in the event of a crisis or near crisis,” says Kawai. Here he is referring to the expected move by Asean+3 finance ministers to allow borrowers from the CMIM to have access to more than 20% of their agreed credit line without having to accept an IMF programme.

Even so, the amounts available from the CMIM for the 13 Asean+3 countries (plus Hong Kong) eligible to contribute to, and borrow from, it without having to go to the IMF are relatively small, he says.

For example, Korea could gain only 20% of its entitlement of $19.2 billion from the CMIM without an IMF programme compared with the $30 billion it drew in swaps with the US Federal Reserve in 2008. Major Asean states are entitled to $11.38 billion.

“If there is a big crisis, then the CMIM is going to have to work with the IMF,” says Kawai, and therefore, “Asians need to be learning lessons from what is happening in the eurozone and also from the European crisis.” That way they will know better how global and regional monetary cooperation can work in tandem, he says.

FUTURE ALLOCATIONS

So could the CMIM become significantly larger in the future, given that countries in the region have some $5 trillion of foreign exchange reserves? “Over time, it could,” says Kawai, given the size of these resources. Doubling the current size of the CMIM is a first step. Doing that will allow South Korea, for example, to borrow up to $40 billion (with an IMF programme) and Indonesia some $22 billion, he says.

“The focus of the debate on the CMIM needs to be on competence and capability as much as on size,” says Shigemitsu Sugisaki, a former deputy managing director of the IMF and now vice chairman of Goldman Sachs, Japan.

“In Asia the financing of a regional fund was discussed before establishing a surveillance mechanism – which is putting the cart before the horse. A regional surveillance mechanism is essential to support and evaluate the need for financial assistance, he says.

This deficiency is being made good with the formal opening of the Asean+3 Macroeconomic Research Office (AMRO) in Singapore at the beginning of this year. AMRO styles itself as the independent macroeconomic surveillance unit of the CMIM and is responsible for monitoring the macroeconomic and financial situation of, and identifying emerging vulnerabilities within, the Asean+3 region and its individual economies.

“Monetary cooperation on the regional and global level is useful, particularly when they work together, but it is harmful when they are not coordinated with each other,” Sugisaki says.