Chiang Mai Initiative, liquidity fund for
Asian states,
on verge of
finally being realised?
By Jon Fernquest 
The Asian
Development Bank (ADB) is holding its annual meeting on the island of Bali
this week and has already made some significant progress on regional
economic cooperation.
Regional economic cooperation among Asian states has been on the agenda ever since the 1997 Asian Financial Crisis.
Asia's over-reliance on the IMF was revealed during the 1997 crisis when many Asian economies such as Thailand and South Korea faced a debilitating credit crunch.
Since then the IMF has become increasingly irrelevant in Asia as Asian states have sought to accumulate foreign exchange reserves as a safety buffer (Read article by economist Shinji Takagi).
In the wake of the 1997 crisis the Chiang Mai Initiative (CMIM) set up a system of bilateral currency swaps between Asian countries that are still in use.
(Read short history and background article on the Chiang Mai Initiative from Peterson Institute for International Economics and read about Japan’s Bilateral Swap Arrangements (BSAs) under the Chiang Mai Initiative (CMI))
A fully functional multilateral Asian liquidity fund (or "multilateral reserve pooling mechanism") has been held back by political rivalries between the largest Asian states China and Japan. In the end, each agreed to make equal contributions to the new fund (See Financial Times).
It is only recently with the onset of the global financial crisis that Chiang Mai Initiative partners have gotten really serious about finding a localized Asian solution to credit crunches and short-term liquidity shortages
Calls to move away from the US dollar as the reserve currency for the international financial system have been made recently both by China and by the UN Stiglitz Commission (Read about the Stiglitz and China perspectives, also read the original Stiglitz opinion piece and the preliminary report) and a more recent Stiglitz opinion piece in the Bangkok Post).
A successful ASEAN+3 fund might be the first step away from the US dollar as the global reserve currency.
The annual ADB meeting also featured a panel on Enhancing Asian Institutions: ASEAN's Role in Regional Integration (Read freely downloadable papers).
Two other important points made in today's article are:
1.
The Chiang Mai Initiative (CMIM) will only supplement, not substitute
for or replace the IMF.
2. Demand generated within Asia will eventually lead Asia's recovery out of the slump (Read previous Chalongphob interview).
2. Demand generated within Asia will eventually lead Asia's recovery out of the slump (Read previous Chalongphob interview).
Vocabulary:
Chiang Mai Initiative (CMI, CMIM) - an arrangement of currency swaps between Asian states to help each other out when they have liquidity difficulties, began in 2000 (Read history)liquidity fund - money set aside and kept for times when there is a shortage of money
on verge of Y - Y is about to happen, Y will happen after a short time
finally X - X is finished after waiting or delay
realised - when what was planned is completed
Asian Development Bank (ADB) - a regional development bank established in 1966 to promote economic and social development in Asian and Pacific countries through loans and technical assistance (See website and Wikipedia and backgrounder) .
a backgrounder - an article that provides basic information on a subject (background information)
economic cooperation - when countries work together in their economic policies
regional economic cooperation - when the countries in a region such as ASEAN work together in their economic policies
on the agenda - one of the issues that will be dealt with by policy or in a meeting
debilitating - making weaker
a credit crunch - a lack of liquidity in the economy, 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)
over-reliance on Y - need Y too much
increasingly irrelevant in Asia -
in the wake of X - after bad event X
multilateral - relation involving many countries
bilateral - relation involving two countries
currency swaps, swaps - an agreement to exchange one currency for another currency and to reverse this exchange on some date in the future (Source: Peterson Insitute of International Economics)
bilateral currency swaps - when the central banks of two countries engage in a currency swap
bilateral swap arrrangements (BSAs), bilateral swap programme - currency swap arrangements between two countries to help them in case of liquidity problems
multilateral Asian liquidity fund - money that all Asian states contribute to and can use in an emergency
held back by Y - delayed, prevented from completing successfully
a rivalry - competition and fighting between people, businesses, or states that want to get the same thing
rivals - people or groups fighting for something they both want
political rivalries - when political groups fight for power
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
a reserve currency - a currency used to hold foreign reserves (See Wikipedia)
onset of Y - beginning of Y
the Stiglitz Commission - a UN commission on how to deal with the global economic crisis, headed by Nobel prize winning economist Joseph Stiglitz, issued its preliminary report just before the recent G20 meeting in London (See )
perspectives -
Asean+3, ASEAN Plus Three - the Southeast Asian countries of ASEAN plus China, South Korea, and Japan (See Japan Ministry of Finance)
ASEAN+3 fund - the multilateral Asian liquidity fund that is being created
Here is today's article:
ASEAN, China, Japan, SKorea finalise crisis pact
16 hours agoNUSA DUA, Indonesia (AFP) — Ten Asian countries plus China, Japan and South Korea agreed Sunday to set up a 120-billion-dollar emergency currency pool to boost liquidity and help the region overcome the global crisis.
Finance ministers of the 10-member Association of Southeast Asian Nations (ASEAN) plus China, Japan and South Korea [ASEAN+3] announced the deal after talks alongside the Asian Development Bank (ADB) annual meeting in Indonesia.
"We are pleased to announce that we have reached agreement on all the main components of the CMIM (Chiang Mai Initiative) and decided to implement the scheme before the end of the year," the ministers said in a joint statement.
[Note: "The agreement includes each member country's contributions, borrowing accessibility and creation of a financial market surveillance mechanism to oversee the scheme."]
a
pact - an agreement
a pool, a shared pool - a shared set of resources gathered together by a group for the group to use
emergency currency pool - when several countries put money together to use if there is an emergency
boost liquidity - increase liquidity
components - parts
implement - put a plan into action, carry out or execute a plan
joint statement - saying officially with others what your opinion on an issue is
contributions - the amount given by each member to the shared fund
accessibility - when someone can get or use something
borrowing accessibility - when a member can use or "get access to" the fund
surveillance - the careful watching of some activity for wrongdoing
financial market surveillance - carefully watching financial markets for wrongdoing
a mechanism - a machine or system that performs some function
a pool, a shared pool - a shared set of resources gathered together by a group for the group to use
emergency currency pool - when several countries put money together to use if there is an emergency
boost liquidity - increase liquidity
components - parts
implement - put a plan into action, carry out or execute a plan
joint statement - saying officially with others what your opinion on an issue is
contributions - the amount given by each member to the shared fund
accessibility - when someone can get or use something
borrowing accessibility - when a member can use or "get access to" the fund
surveillance - the careful watching of some activity for wrongdoing
financial market surveillance - carefully watching financial markets for wrongdoing
a mechanism - a machine or system that performs some function
Japan and China will contribute 38.4 billion dollars each, with China's share including 4.2 billion dollars from Hong Kong. South Korea was the next largest with 19.2 billion dollars.
Among the ASEAN countries the biggest contributors were Indonesia, Singapore, Thailand and Malaysia, which agreed to provide 4.77 billion dollars each.
Only a supplement to IMF
The ministers were careful to explain the scheme was intended to "supplement" existing international financial institutions amid concerns from some quarters that it is a bid to circumvent the International Monetary Fund (IMF).ASEAN member states were forced to implement unpopular economic reforms in exchange for massive IMF bailouts after the 1997-1998 Asian crash, leading to calls for the creation of a regional crisis fund.
But the finance ministers played down any suggestion they were snubbing the IMF and its sister lender, the World Bank, saying the move was only a "natural" step on the path of closer regional economic cooperation.
ADB managing director general Rajat Nag said the scheme was "very much complimentary" to the IMF. He said the Bretton Woods institution was in no danger of losing its place as the global economic watchdog.
"We certainly see this as a very welcome step to help in the current financial crisis," he told reporters at the ADB meeting at the luxury beach resort of Nusa Dua, Bali.
"I should make the point that the ASEAN plus Three finance ministers do not see this in any way being a substitute for the IMF," he added.
supplement - add to
circumvent - go around, avoid
a bid to circumvent - an attempt to avoid, trying to avoid
economic reforms - improvements to the economy
bailout - helping someone out of difficult situation by giving them money (See glossary)
IMF bailouts - when the IMF acts as lender of last resort in the international financial system and loans money to countries having financial problems
lender of last resort - the bank that will lend when every other bank cannot (the central bank within a country, the IMF for whole bankrupt countries) (See Wikipedia)
a fund - money to be used for a special purpose
regional crisis fund - money to be used by countries in a region when there is an economic crsis
play down Y - try to lessen importance of issue Y
played down any suggestion that... - tried to lessen the importance of suggestions that ...
snub - insult someone by saying something bad or ignoring then
snubbing the IMF - insulting the IMF
a "natural" step on the path of closer regional economic cooperation - this is typical on the road to cooperation
X and Y are complimentary - X and Y help each other when they exist together, they are not "substitutes" or "replacements"
Bretton Woods - the famous conference just after World War II that designed the modern world financial system, Keynes was an attendee at this event (See Wikipedia)
an institution - an large important organisation or system of doing things
watchdog - an organisation that oversees and makes sure that everyone plays by the rules (See glossary)
circumvent - go around, avoid
a bid to circumvent - an attempt to avoid, trying to avoid
economic reforms - improvements to the economy
bailout - helping someone out of difficult situation by giving them money (See glossary)
IMF bailouts - when the IMF acts as lender of last resort in the international financial system and loans money to countries having financial problems
lender of last resort - the bank that will lend when every other bank cannot (the central bank within a country, the IMF for whole bankrupt countries) (See Wikipedia)
a fund - money to be used for a special purpose
regional crisis fund - money to be used by countries in a region when there is an economic crsis
play down Y - try to lessen importance of issue Y
played down any suggestion that... - tried to lessen the importance of suggestions that ...
snub - insult someone by saying something bad or ignoring then
snubbing the IMF - insulting the IMF
a "natural" step on the path of closer regional economic cooperation - this is typical on the road to cooperation
X and Y are complimentary - X and Y help each other when they exist together, they are not "substitutes" or "replacements"
Bretton Woods - the famous conference just after World War II that designed the modern world financial system, Keynes was an attendee at this event (See Wikipedia)
an institution - an large important organisation or system of doing things
watchdog - an organisation that oversees and makes sure that everyone plays by the rules (See glossary)
The move comes amid China's rise as a global economic power and as the world economy suffers its worst slump since the 1930s Great Depression thanks to a banking crisis triggered by bad mortgages in the United States.
Chinese Vice Finance Minister Li Yong, who is attending the talks here, last month condemned the dollar-dominated international monetary system as "a major defect in the current international economic governance structure."
Purpose of Chiang Mai Initiative
The Asian ministers said the currency swap initiative met the region's two "core objectives" -- to address short-term liquidity difficulties and "supplement existing international financial arrangements.""The total size of the CMIM is 120 billion dollars, with the contribution proportion between ASEAN and the plus-three countries at 20:80," the statement said. The plus-three countries are China, Japan and South Korea.
In addition to the Chiang Mai fund, Japanese Finance and Economy Minister Kaoru Yosano said Tokyo was considering a scheme to offer yen swaps worth up to six trillion yen (60.4 billion dollars) to be tapped in emergencies.
Such swap agreements can be tapped to ease liquidity trouble as they boost the amount of foreign currency regional banks can access while helping companies that use foreign currencies when trading.
address a problem -
make efforts to solve a problem
short-term liquidity difficulties - finding enough money to continue day-to-day business operations and survive
supplement existing international financial arrangements -
tap - use
tapped in emergencies - used in emergencies
tapped to ease liquidity trouble - used to ease liquidity trouble
short-term liquidity difficulties - finding enough money to continue day-to-day business operations and survive
supplement existing international financial arrangements -
tap - use
tapped in emergencies - used in emergencies
tapped to ease liquidity trouble - used to ease liquidity trouble
Demand within Asia, the way out of the slump
ADB president Haruhiko Kuroda said Asia's main export markets had experienced a "massive contraction in demand" due to the downturn in the world economy and the region had to end its heavy reliance on export sales.He said any recovery in Asia would likely be driven by domestic demand.
"Over the longer term, developing Asia is starting the process of rebalancing growth from excessive dependence on external demand to greater resilience on both consumption and investment," he said.
"Already there are signs that domestic consumption is remaining strong in Asia and may well lead the way out of this downturn."
The ADB is predicting growth of 3.4 percent for the region this year, compared with more than nine percent in 2007.
slump, economic slump - a
period of slow economic activity and growth
contraction - shrinking, growing smaller
massive contraction in demand - suddenly many many people are not buying things anymore
heavy reliance on export sales - national income comes largely from imports
recovery - when the economy gets better (more jobs, higher incomes)
driven by domestic demand - caused by families (households) in the country buying things
excessive dependence on external demand - your economy grows largely because people outside your country buy your goods
resilience - recovers quickly, not damaged or down for long
contraction - shrinking, growing smaller
massive contraction in demand - suddenly many many people are not buying things anymore
heavy reliance on export sales - national income comes largely from imports
recovery - when the economy gets better (more jobs, higher incomes)
driven by domestic demand - caused by families (households) in the country buying things
excessive dependence on external demand - your economy grows largely because people outside your country buy your goods
resilience - recovers quickly, not damaged or down for long
(Source: Bangkok Post, front page, 04-05-09, ASEAN, China, Japan, SKorea finalise crisis pact, AFP, link)
