The Chiang Mai Initiative

[HenryTo]

This is South East Asia's own bailout fund - created after the 1997 to 1998 Asian Crisis. Eastern and Central Europe would definitely need a similar institution after this is all over:
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FACTBOX-Asia's initiative on currency swap network

By Yoko Nishikawa

Dec 12 - As Asia grapples with the fallout from the global financial crisis, officials in the region seek to strengthen regional financial safety nets to avoid a repeat of the financial crisis that rocked the region in 1997/98.

The following are key aspects of a regional network of currency swap arrangements called the Chiang Mai Initiative.

CHIANG MAI INITIATIVE

-- The CMI is currently a network of bilateral currency swap agreements among the Association of Southeast Asian Nations plus China, Japan, and South Korea , launched in May 2000 after a meeting of Asian finance ministers in the Thai city of Chiang Mai.

-- The idea is that a country facing a short-term liquidity shortage can borrow reserves from partners in the network to absorb any heavy selling pressure on its currency without having to resort to damaging devaluations, as some did in the crisis a decade ago.

-- The total size of the bilateral swap lines is $118 billion, including a newly expanded yen-won swap line between Japan and South Korea, effective until the end of April. [ID:nSEO226662]

But Japan says only $75 billion of the new total is realistically available in case of a crisis because the total size of the CMI includes symbolic swap pacts where poor countries offer help to rich ones.

-- South Korea and China announced a new swap arrangement worth 38 trillion won on Friday, in addition to an exsiting swap pact under the CMI. [ID:nSP283370] The new yuan-won swap line will not be added to the total size of the CMI, a Japanese official said.

-- Most swap deals are denominated in dollars, meaning potential borrowers get dollars in exchange for their local currency through the swap agreements.

-- None of the swap lines have been tapped so far.

-- Some of the bilateral swap lines are two-way arrangements. For instance, Japan and Thailand have a two-way swap in which Japan would provide U.S. dollars worth up to $6 billion for Thai baht. In return, Thailand would swap U.S. dollars worth up to $3 billion for yen in case Japan faces a currency crisis.

-- There are also two types of currency swap lines. One is heavily linked to the IMF reform programme, the other is not. For instance, Japan and South Korea have a yen-won swap line, which is arranged between their central banks and is meant to stabilise financial markets in case of yen or won shortages. This swap could be used in the event of any temporary need for funds if, for example, a central bank was having settlement troubles or needing to intervene in the foreign exchange market. There is no link to an IMF-supported programme.

-- Most other bilateral swap lines in the network are designed to cope with emergencies such as a balance of payment crisis, and 80 percent of the funding is linked to IMF-mandated programmes. Analysts say this has made Asian countries hesitant to use them.

-- Analysts have long criticised the initiative as too small, although the Chang Mai Initiative is meant to supplement rather than replace the existing international financial arrangements such as those of the IMF. One reason for this is that Asia still lacks a credible system of monitoring regional economic and financial conditions.

-- In hopes of promptly activating the swap lines when needed, the group has a scheme where a nation in need would only have to ask one coordinating country to collectively activate several bilateral swap deals.

-- In 2007, finance ministers from the ASEAN+3 group agreed to transform the initiative into a more powerful multilateral scheme in the form of a "self-managed" reserve pooling mechanism governed by a legally binding single contract. Having a "self-managed" reserve pooling arrangement means member countries would still manage their funds at home and receive interest income from managing the reserves.

-- In May 2008, the ASEAN+3 finance ministers agreed that the total size of the multilateral framework would be at least $80 billion. Under the agreement, Japan, China and South Korea provide 80 percent of the total and the rest would come from ASEAN countries. [ID:nL04527758]

-- Japanese officials say it remains unclear whether the multilateral scheme would fully replace the current bilateral swap lines or some of them will exist simultaneously.

-- Finance ministry officials in the region are trying to nail down details, such as how funds from the multilateral scheme would be provided to a country in crisis and who would make such decisions. Also, there has been discussions on whether the group should set up a secretariat to enhance regional financial cooperation.

[HenryTo]

Asian policy makers preparing to double the size of its regional bailout fund from $120 billion to $240 billion.

http://www.bloomberg.com/news/2012-03-28/asia-set-to-double-reserve-pool-as-europe-squeezes-imf-economy.html