ASEAN Plus Three Fund now a done deal?
By Jon Fernquest |
Asian leaders today met in Beijing ahead of the two-day Asia Europe Meeting (ASEM) to discuss economic cooperation to counter the ongoing global financial crisis.
A new ASEAN Plus Three Fund to deal with the financial crisis in Asia was the most important result of the meeting.
The $US80 billion ($122 billion) fund will be put in place by the end of June next year.
(Comment: June next year doesn't seem quick at all. So maybe the deal is not quite done?).
An independent regional financial market surveillance organisation will also be put in place.
The ASEAN Plus Three group includes South Korea, China, Japan as well as the 10 members of ASEAN: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
The initial agreement called for South Korea, Japan and China to provide 80 per cent or $US64 billion with ASEAN members providing the remaining $US16 billion.
Disagreements have continued between South Korea, China and Japan on cost-sharing and the way the fund would be managed.
(In a related story, read about new funds being made available by the IMF to developing countries that are having trouble during the crisis.)
History
The 1997 Asian financial crisis damaged the economies of Asia.
Regional financial cooperation between Asian states held great promise for limiting economic damage in any future crisis.
Financial cooperation between Asian states began in 2000 with the Chiang Mai Initiative that created a network of currency swaps between Asian states known as bilateral swap arrrangements (BSAs) (See diagram of existing BSAs).
BSAs address short-term liquidity difficulties and supplement existing financial arrangements outside the Asia region provided by organisations such as the IMF.
Since 2005, ASEAN+3 Finance Ministers' have been planning a more powerful multilateral reserve pooling mechanism in the their annual meetings.
In May of this year ASEAN+3 member states finally agreed to set up a shared pool of foreign-exchange reserves amounting to $US80 billion (Read Far Eastern Economic Review article).
Asian Bond Initiative
Post-1997 financial cooperation between ASEAN states has also progressed in other areas.
Since 2003 the Asian Bond Initiative has sought to develop regional bond markets and reduce the dependence of Asian states on short-term foreign currency-denominated financing
Asian states have been vulnerable to volatility in short-term capital movements through maturity and currency mismatches.
Maturity mismatches occur when Asian banks obtain short-term funds (liabilities) which they lend out long-term (assets).
Currency mismatches occur when Asian banks obtain funds in a foreign currency buy lend in the local currency.
If the costs of the two types of funds changes quickly and unpredictably by large amounts (volatility) these mismatches can cause a bank to become insolvent (Source: Japan Finance Ministry, link).
(Source #1: AFP and the Asutralian, link)
(Source #2: Regional Financial Cooperation Among ASEAN+3, Japan Ministry of Finance, link).
Vocabulary:
ASEAN - the organisation for regional cooperation between Southeast Asian states (Thailand, Vietnam, Singapore, Malaysia, Laos, Brunei, Indonesia, Cambodia, and Myanmar) (See Wikipedia)
Asean+3, ASEAN Plus Three - the Southeast Asian countries of ASEAN plus China, South Korea, and Japan (See Japan Ministry of Finance)
Asia Europe Meeting (ASEM) - a regular meeting between European and Asian states, a way of deepening the relations between Asia and Europe at all levels, the three pillars of ASEM are: political dialogue, security and the economy, and education and culture (See Wikipedia)
ASEAN Plus Three Fund - a shared fund of foreign exchange reserves from Asian states to help other Asian states if they have liquidity problems in their financial system (See glossary)
a done deal - a deal that has been agreed upon already
put in place - put something in its correct position so that it is ready to be used (See glossary)
independent - not connected, therefore influenced less by the outside
surveillance - the careful watching of some activity for wrongdoing
financial market surveillance - carefully watching financial markets for wrongdoing
funds - money given for a special purpose
regional financial cooperation - when the states in a region (Asia, Southeast Asia) help each other with banking and financial arrangements
held great promise - seemed likely to be successful
Chiang Mai Initiative - an arrangement of currency swaps between Asian states to help each other out when they have liquidity difficulties, began in 2000
currency swaps - s contract that commits two parties to exchange, over an agreed period, streams of interest payments denominated in different currencies, used by businesses doing business internationally to protect themselves from the risk of currencies changing value (See Wikipedia)
bilateral swap arrrangements (BSAs) - currency swap arrangements between two countries to help them in case of liquidity problems
liquidity difficulties, a credit crunch - a state in which there is a short supply of cash to lend to businesses and consumers and interest rates are high, a sudden reduction in the availability of loans (or "credit") or a sudden increase in the cost of obtaining a loan from the banks, a period when credit and investment capital is difficult to obtain causing a shortage of liquidity (See Wikipedia)
multilateral - relation involving many countries
bilateral - relation involving two countries
a pool, a shared pool - a shared set of resources gathered together by a group for the group to use
pooling - gathering together resources for a group to share
reserves, foreign exchange reserves - amounts of foreign currencies held by the central bank of a country
multilateral reserve pooling mechanism - a way for many countries to gather together and share part of their foreign exchange reserves
shared pool of foreign-exchange reserves -
progressed - gradually improving, getting nearer to achieving goal
short-term foreign currency-denominated financing -
vulnerable - weak and without protection, easily hurt
short-term capital - money lent businesses for short periods of time
capital movements - movements of investment money between countries
volatility in short-term capital movements - when money lent for short periods of time flows into and out of a country suddenly and unexpectedly
balance sheet - the financial state of a firm at a particular date, the sources of funds (liabilities and net worth) and uses of funds (assets) (See Wikipedia)
liabilities - an obligation that legally binds an individual or company to settle a debt (See Wikipedia)
assets - everything owned by a person or company that has value and can be converted into cash (See Wikipedia)
maturity - the length of a financial arrangement such as a bond or a loan
maturity mismatches - when banks obtain short-term funds (liabilities) which they lend out long-term (assets)
currency mismatches - when banks obtain funds in a foreign currency (dollars) and then lend in the local currency (baht)
volatility - moving suddenly and unexpectedly by large amounts
insolvent - lack money needed to continue in business, cannot repay your debts in full (See glossary)
