Asia Set to Double Reserve Pool as Europe Squeezes IMF: Economy

Asian policy makers are preparing to double a $120 billion reserve pool to defend the region against shocks, reducing their reliance on traditional backstops such as the International Monetary Fund as Europe saps resources.

Officials meeting in the Cambodian capital of Phnom Penh this week will discuss boosting to $240 billion the so-called Chiang Mai Initiative Multilateralization agreement, a foreign-currency reserve pool created by Japan, China, South Korea and 10 Southeast Asian nations that took effect in 2010, said Wei Benhua, director of the fund’s surveillance unit in Singapore.

Asian nations, holder of more than half of global reserves, are looking within themselves to protect the world’s fastest-growing region as Europe and the U.S. struggle to recover from the worst economic slump since World War II. The IMF, which bailed out South Korea, Indonesia and Thailand during the 1997-98 Asian financial crisis, estimates that the euro area will take up about 80 percent of its total credit in 2014.

“The global financial crisis and Europe’s debt crisis show that when markets become irrational or extremely volatile, countries need all the resources they can get,” said Tai Hui, Singapore-based head of Southeast Asian economics at Standard Chartered Plc. “When there are trillions sloshing around in foreign-exchange reserves in Asia, adding another $120 billion is very small.”

Crisis Prevention

The aim of a larger reserve pool is “crisis prevention,” said Wei, who heads the Asean+3 Macroeconomic Research Office in Singapore and is a former deputy director at China’s State Administration of Foreign Exchange. Deputy finance ministers from Southeast Asia, China, Japan and South Korea will discuss the plan this week and submit it to their ministers for a May approval, he said.

The countries have bolstered cooperation since the regional crisis almost 15 years ago, when Thailand’s baht devaluation set off a plunge in neighboring currencies and sparked a financial meltdown. Central banks are also diversifying their reserves and moving into yuan-denominated assets, while increasing bilateral currency swaps to support trade and investment.

“The expansion is necessary because Europe’s crisis, though it appears to be calming down for now, hasn’t completely disappeared,” Fumihiko Igarashi, Japan’s Vice Finance Minister, told reporters March 26. “There remains the risk of the contagion and we should enhance Asia’s resilience which may be caused by fund withdrawals by European lenders from Asia. We need to prepare for the worst case scenario.”

Help from developed countries and the global institutions led by them may be limited as Europe’s debt crisis is prolonged. European ministers meet this week to discuss enlarging their crisis fund as the cost of saving the region’s economies from bankruptcy exceeds 385 billion euros ($514 billion).

Europe’s Options

Euro-area finance ministers are weighing their options on the temporary European Financial Stability Facility, which manages rescue programs for Ireland, Portugal and Greece, and its permanent successor, the European Stability Mechanism. They may decide to increase their crisis fund to a total capacity of 692 billion euros from a current limit of 500 billion euros when they meet March 30, a euro-area official said.

Reports in Thailand today showed exports rose for the first time in four months while manufacturing slumped for a sixth month in February. The U.S. may report a rebound in durable goods orders, according to a Bloomberg survey of economists.

The Chiang Mai Initiative supplements existing international financial arrangements through currency swap transactions among member nations if needed, or can act as a backstop for those facing balance-of-payments or short-term liquidity difficulties. The swap agreements have not been tapped.

Access to Reserves

The proposed increase in the Chiang Mai Initiative will be a fraction of the foreign-currency holdings that Asian nations have accumulated, totaling more than $6.5 trillion. China alone has about $3.2 trillion of reserves, followed by Japan’s holdings of more than $1.2 trillion.

The pool widens access to reserves that will allow countries such as Indonesia and Thailand, recipients of IMF bailouts during the Asian crisis, to defend their currencies in times of turmoil. The IMF loaned more than $100 billion to the two nations and South Korea, and governments were forced to cut spending, raise interest rates and sell state-owned companies in return.

Still, regional safety nets do not erase the need for global ones, Singapore central bank Managing Director Ravi Menon said in January. It is in the interest of Asian countries to have the IMF continue playing an “active role” in the region and complement regional financing arrangements such as the Chiang Mai Initiative, he said.

Capacity Diminished

“Where a crisis is largely regional in nature, contagion can be rapid and the capacity of a regional safety net can be diminished,” Menon said. “Global safety nets may well be necessary as a complement in situations like these.”

Swap agreements have been used to increase currency liquidity during emergencies. The U.S. Federal Reserve and other central banks established swap lines in December 2007 to boost dollar liquidity. The use of the swaps peaked at $583.1 billion in December 2008, with deals encompassing 14 other central banks. The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened.

With Asia continuing to lead global growth and being the recipient of capital inflows as investors seek higher returns, Standard Chartered’s Hui said it’s timely for officials to boost regional safety nets.

“When the emergency does hit, you always wish you have more rather than less,” Hui said.

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