The fund is 50% bigger than the one proposed last May, and represents a significant expansion of the current Chiang Mai Initiative, which allows only bilateral currency swaps.
The fund is part of a strategy to shield currencies from the sorts of speculative attack that depleted the reserves of Thailand, South Korea, and Indonesia in the Asian financial crisis a decade ago. Eight out of the 10 most regularly traded Asian currencies (ex-Japan) have fallen against the dollar in the past 12 months: the Korean won has plummeted by 37% and the Indonesian rupiah by 24%.
Affected currencies are at risk of further losses as developed nations cut overseas investment and investors sell down their holdings of emerging markets stock and bond holdings. Ministers at the meeting admitted that capital flows into the region have already decreased due to global de-leveraging, and many are worried that this will significantly undermine growth prospects.
During the Asian financial crisis, Indonesia, Thailand and South Korea were forced to spend most of their currency reserves trying to prop up exchange rates, and then to turn to the IMF for $100bn bailout. As a result, the three governments were forced to cut spending, raise interest rates and sell state-owned companies.
Since then, Japan, China and South Korea together with the Asean economies have amassed more than $3,600bn of foreign-currency reserves, about half of the global total. But many are already dipping into reserves to support their currencies. Malaysia’s gold and foreign-currency reserves fell to $91.3 billion in January from $123.7 billion last August. Indonesia’s reserves have fallen by $10 billion to $50.9 billion between July 2008 and the end of January 2009.
No date has been set for the completion of the new pool, and many fear that ironing out the final details will take some time – it has taken 10 years for the nations in question to reach this point. In the interim, many are expanding or establishing new bilateral currency swap agreements. For example, this month, China and Malaysia agreed on a three-year 80 billion-yuan ($11.7 billion) currency swap and Japan and Indonesia agreed to boost their existing bilateral agreement from $6bn to $12bn.
It is thought that the new currency pool may break the link between borrowings and the conditions built into IMF lending programs, which currently applies to 80% of borrowing under existing bilateral currency swaps. Under the new initiative, more funds may be tapped before the borrower is subject to such measures, the finance ministers said.
