For weeks bankers and investors around the world have been wondering how the U.S. would insert itself into the growing Asian financial crisis and lend its leadership to some type of resolution. America's deep aversion to foreign bailouts has prevented any talk of outright U.S. loans. At the same time, Washington officials have been worried about a Japanese-led proposal for an Asia fund that would throw money at the problem without demanding that Asians reform their economies.
But with the threat of a regional meltdown growing, U.S. and Asian officials have finally reached a consensus on a rescue plan. It will dominate the 18-member Asia Pacific Economic Cooperation summit in Vancouver on Nov. 22-25. The plan, hatched in Manila on Nov. 19, would give the International Monetary Fund new flexibility to appropriate large sums--and fast--to countries in economic distress. That could free up as much as $150 billion in emergency funds.
PEER PRESSURE. The ministers also set up a new forum for Asian countries to keep better tabs on their neighbors' economies and prevent problems from spreading. Under the pact, Asian officials will meet twice a year to lean on poor performers to mend their ways--an arrangement Philippine finance officials likened to "Alcoholics Anonymous." Adds a U.S. official: "The Asian countries discovered the hard way they were much more affected by developments in neighboring countries over the past six months than they would have ever imagined."
The movers and shakers behind the plan were U.S. officials, led by U.S. Deputy Treasury Secretary Lawrence H. Summers, who opposed Japan's scheme to create a new $100 billion Asia-only fund for such crises. Japan had originally wanted to allow participating countries to draw down those funds at will. But the U.S. vigorously resisted Tokyo's move to dispense funds without requiring stiff reforms.
The new proposals satisfy both Washington's concerns for reform and Tokyo's desire for an Asian solution. Smaller Tiger countries were also concerned that any Asian fund would be dominated by the Japanese or Chinese--and hence, could make them beholden to those regional giants. "There was a great desire for the U.S. to play a big role," says an official from one of the negotiating countries. In a concession to the Japanese, the U.S. agreed to the new Asia fund. But in contrast to the original Japanese plan, it will have no dedicated staff and have no specified funding level--the countries will make open-ended pledges to help each other as events warrant. Moreover, the funds can only be lent with IMF supervision.
The Manila pact comes at a critical moment. With the South Korean economy under siege, many were questioning whether the U.S., the IMF, and others could deliver the $60 billion or so needed if South Korea asks for help to pay off short-term loans to foreign lenders. The IMF has only about $50 billion in funds left at its disposal, pending more distributions from member countries. IMF bylaws restrict the amount that any one country can get. IMF bailouts of Indonesia and Thailand required special board approval. And IMF officials were already signaling that they would need similar approval to lend more than $15 billion to Seoul. The Asian crisis "is exposing the weak link in the system: The IMF doesn't have the resources," notes Zurich Kemper Investments Inc. economist David D. Hale.
The new plan should go a long way toward calming such fears. The IMF will have room to provide additional short-term funding to supplement traditional lending, which can run up to 10 years. But the funds will come at a cost: Borrowers would pay market interest rates, which could run two to three times the IMF's current 4.33% rate for most loans.
The plan also calms fears about the U.S. role in the region. The U.S. had failed to participate in a $17.2 billion rescue package for Thailand in August and saw its $3 billion contribution to a similar bailout of Indonesia shot down by Congress on Nov. 13. Asian officials then questioned Washington's leadership in a region where it has long played a strong military, political, and economic role.
"COCKTAIL PARTY." Yet details still need to be worked out, and the fund may not be operational in time to rescue South Korea. A worried IMF is ready to negotiate a bailout. But South Korean officials fear that admitting problems could cost them in national elections. "Our hands are tied if they won't invite us in," laments an IMF official. "There's a lot of machismo involved here. But if there's a crisis, it'll make Thailand and Indonesia look like a cocktail party."
Such fears prompted the Manila accord. For the Clinton Administration, more is at stake than reasserting leadership in the Pacific. Some Wall Streeters think a further economic slide in Asia would lead some countries to dump their stash of U.S. treasury notes. U.S. officials also worry that the currency contagion, if not checked, could spread throughout the U.S. backyard: Latin America. But with the new pact, President Clinton hopes the Asian flu will stay mainly on the other side of the Pacific.