----- Original Message -----
From: Gold Anti-Trust Action Committee
To: [EMAIL PROTECTED]
Sent: Thursday, May 03, 2007 7:50 PM
Subject: [GATA] Asia will start its own currency pool so it can dump IMF
Asia will start its own currency pool so it can dump IMF
Submitted by cpowell on 05:50PM ET Thursday, May 3, 2007. Section: Daily
Dispatches
Asia Likely to Draw on $2.7 Trillion
in Reserves to Safeguard Currencies
By Shamim Adam
Bloomberg News Service
Thursday, May 3, 2007
http://www.bloomberg.com/apps/news?pid=20601080&sid=aIKwOaFW43dk&refer=a...
KYOTO, Japan -- Asian finance ministers will this week probably agree to pool
part of the region's $2.7 trillion in foreign-exchange holdings to prevent a
repeat of the crisis that depleted reserves ten years ago.
Japan's Koji Omi, China's Jin Renqing, South Korea's Kwon Okyu and Southeast
Asian ministers are meeting at the sidelines of the Asian Development Bank's
annual gathering in Kyoto to discuss a plan to combine some of their reserves
to be tapped by member nations when needed. The current arrangement, called the
Chiang Mai Initiative after the Thai city in which the accord was forged in
2000, allows only for bilateral currency swaps.
Broadening the initiative is more than just a safeguard against turmoil,
analysts say. It's an instrument for the region's governments, stung by
conditions attached to loan packages by the International Monetary Fund during
the 1997-98 financial crisis, to reduce reliance on the agency in the future.
"These are attempts to achieve some form of independence, not to subject
themselves again, should there ever be another crisis, to bailout packages and
the rather draconian terms that come with it," said Joseph Tan, a
Singapore-based economist at Standard Chartered Bank Plc.
The IMF arranged over $100 billion of loans to Thailand, Indonesia and South
Korea during the crisis after their currencies collapsed. In return,
governments were forced to cut spending, raise interest rates and sell
state-owned companies.
Critics said the policies deepened the region's recession, as higher borrowing
costs hurt businesses and crimped domestic consumption. The IMF, in a 1999
assessment of its handling of the crisis, said it "badly misgauged" the
severity of the collapse and acknowledged its fiscal prescriptions for the
three countries were too harsh.
Its debtors couldn't wait to free themselves from the dictates as all three
settled arrears years ahead of schedule. The fund prescribed Thailand the
"wrong medicine," former Prime Minister Thaksin Shinawatra said and asked
citizens to fly the national flag on offices, homes, and factories when it made
the last of its payments in 2003.
After clearing loans from the fund in October, Indonesia's central bank
governor Burhanuddin Abdullah said the country was "no longer a sick member of
the IMF." South Korea's last installment payment of $140 million in August 2001
was accompanied by comments from a government spokesman that it had "retaken
economic sovereignty" and no longer needed prior consultations with the fund.
Finance ministers from China, South Korea, and Japan will gather for a meeting
tomorrow, before getting together with their counterparts from the 10-member
Association of Southeast Asian Nations a day later. Besides reserve pooling,
other issues that may be discussed include the development of the region's bond
markets.
The pool of reserves may ensure central banks have enough to shield their
currencies against any speculative attacks. The unsuccessful defense of their
plunging exchange rates a decade ago depleted the reserves of Indonesia,
Thailand, and South Korea, and prompted them to turn to the IMF to shore up
their finances.
"It's a contingency measure for a country running low on reserves to draw from
that pool," said James McCormack, head of Asian sovereign ratings at Fitch
Ratings in Hong Kong. "It's a commitment from within Asia in times of crisis."
In the years since the crisis, total Asian reserves have risen from $485
billion in 1997 to $3.37 trillion now. China's foreign-currency holdings grew
by $1 million a minute in the first quarter to $1.2 trillion. South Korea's
reserves are now the world's fifth-largest, burgeoning to $244 billion from $7
billion in November 1997.
The amount of reserves in the pool will be important, even though the
likelihood of another collapse in the region's currencies is remote, analysts
say. The total size of the swap agreements between the 13 countries is about
$75 billion from an initial size of $200 million.
"We're not living in 1997 anymore and Asia's financial sector is in
considerably better shape to face headwinds," said Jan Lambregts, head of Asia
research at Rabobank in Hong Kong. "But when a crisis strikes, will the extent
to which these arrangements exist weigh up to the market volumes we see? That's
why the size of such a fund is a significant factor."
The eight-fold increase in the region's international reserves over the past
decade has not gone unnoticed. Some Asian governments have been criticized for
their undervalued currencies which led to the build-up. The accumulation of
such assets is in excess of what the nations need for precautionary measures,
according to a study by U.S. Treasury economists Russell Green and Tom
Torgerson released in March.
"The governments have excessive reserves to a point where they may become a
burden," said Craig Chan, Lehman Brothers Holdings Inc.'s Asian currency
strategist in Hong Kong. "They see reserves as a cushion in an unlikely event
of a similar exodus, which give them confidence they are prepared for it."
Last year, at the Asian Development Bank's annual meeting in the Indian city of
Hyderabad, China, Japan and South Korea said they will start talks about
creating a single monetary unit to reduce costs of doing business between the
region's countries.
Calls to forge a common currency have died down since. ADB President Haruhiko
Kuroda in January said he isn't confident exchange rates can be coordinated
even after an Asean economic community, targeted for 2015, has been
established.
Southeast Asian nations must boost their trade and financial linkages and
establish regional crisis prevention systems before embarking on a common
currency, according to a study commissioned by the group. Implementing such a
unit at this stage is likely to fail, the report said.
Talks on the pooling of reserves or other initiatives on cooperation should be
secondary on the agenda of finance ministers at this week's meeting, said V.
Anantha-Nageswaran of Julius Baer & Co. Ltd. Foremost should be a discussion of
China's currency policy which is inflating its reserves and spurring export
growth, he said.
"The Chiang Mai Initiative is just a talking shop," said Anantha-Nageswaran,
head of research at Julius Baer in Singapore. "The elephant in the room that
everyone's tiptoeing around is the issue of China's exchange rate and how its
export-led growth is coming more and more at the expense of other nations. It's
going to come to a point where it's going to really hurt everybody."
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