TOKYO -- Asian countries are looking to do more to prevent another currency crisis by expanding a multilateral swap arrangement that they can tap at short notice by $24 billion sometime this year.
Japan, China, South Korea and the Association of Southeast Asian Nations, collectively known as the ASEAN+3, will discuss the expansion of the Chiang Mai Initiative, an emergency dollar liquidity facility created after the 1997 Asian currency crisis. The annual meeting of the Asian Development Bank and a meeting of ASEAN+3 finance ministers, both of which are to be held in Yokohama in May, likely will provide an opportunity for such discussions.
The Chiang Mai Initiative is designed to help signatories defend their currencies if they rapidly lose value against the greenback by making dollars available for use in market interventions. It has an overall pool of $240 billion, but just 30%, or $72 billion, can be released with an agreement among the ASEAN+3 alone.
The remaining 70% can be deployed only after a recipient country enters an International Monetary Fund financial assistance program. Since the IMF takes time to make aid decisions, ASEAN has been calling for an increase in the rapid-response portion. Main contributors Japan, China and South Korea were initially resistant to such a move, over concerns about credit risk.
At a working level meeting late last year, the three Northeast Asian countries agreed to work toward increasing the readily accessible portion of the pool to 40%, or $96 billion, on the condition that decisions on releasing funds take into account macroeconomic, fiscal and dollar-liquidity indicators.
Preparing for financial storms
The impetus for this compromise came from growing concerns over the possibility of global economic turbulence. ASEAN nations are especially wary of the potential impact of U.S. interest rate hikes. December's U.S. rate increase has sent the Malaysian ringgit to the lowest level against the dollar since 1998. The Thai baht has also declined against greenback, by roughly 5% since autumn.
If the U.S. Federal Reserve raises rates three times this year as it indicated in December, Asian financial markets would inevitably be affected. The outcomes of upcoming national elections in France, Germany and other European countries may send shock waves through global markets as well.
Japan and China are separately working on bilateral currency swap agreements with Southeast Asian countries. Tokyo is in talks with Malaysia and Thailand, while Beijing has extended its agreements with those two Southeast Asian countries beyond the initial expiration dates, in addition to expanding a swap line for Indonesia in November.