Tue, Nov 11, 2003 - Page 11 News List

Asia urged to set up `buffer' fund

FINANCIAL CRISES LESSONS The Asian Development Bank says the region should pool resources to strengthen its monetary and financial cooperation framework


Southeast Asia and China, Japan and South Korea should set up a common fund from their huge foreign reserves as part of a strategy against regional financial turmoil, said a group of experts.

In one of the most comprehensive studies on East Asia's biggest financial turmoil six years ago, the experts also said the region must pool its resources in dealing with financial sector reforms and move towards greater exchange rate policy coordination.

The Manila-based Asian Development Bank commissioned the study by 23 economists and policy-makers from the US, Japan, Australia, France, Thailand, South Korea, Switzerland and Luxembourg.

"This study is timely because East Asia has reached a critical juncture in its initiatives at regional monetary and financial cooperation," said Yoshihiro Iwasaki, head of the bank's regional economic monitoring unit.

After the 1997 to 1998 financial crisis plunged the region into recession, East Asian countries agreed to strengthen regional monetary and financial cooperation in a bid to prevent future turmoil.

They consulted regularly on financial policies, built up macro-economic and financial monitoring mechanisms, launched a regional bond market and set up a network of bilateral currency swap and repurchase agreements.

These should now be strengthened with "strong political will" into a fully-fledged regional monetary and financial cooperation framework, Iwasaki said.

For instance, the study wants the region's US$33 billion network of 13 bilateral currency swap arrangements expanded into a centralized, multi-laterally run operation.

China, Japan and South Korea now have swap agreements with individual Southeast Asian nations in which each party can ask the other for an agreed amount of funds when faced with crisis.

However, the bilateral swaps are relatively small compared with member countries' foreign exchange reserves as well as the resources to which these countries have through the IMF, Iwasaki said.

For example, Thailand's arrangements with China, Japan and South Korea allow it to draw only about US$7 billion, substantially lower than the US$17.2 billion it sought from the fund during the 1997 financial meltdown.

"There is considerable merit in expanding the size of resources available," Iwasaki said.

He urged East Asia to initially earmark a certain percentage of the countries' foreign exchange reserves for swaps before eventually considering a centralized pool.

Setting up a centralized reserve fund with a mandate for crisis prevention and crisis management could set the pace, as proposed by the study, for a common basket pegging of regional currencies and ultimately, adoption of a single regional currency, he said.

East Asia has also been asked to deepen its bond markets to tap on the region's huge savings during future crises.

These savings run up to more than US$1 trillion in developing Asian nations but are largely locked up in banks.

"Learning from the Asian crisis, it is necessary to reduce this undue reliance on banks for financial inter-mediation as a predominantly bank-based financial sector tends to be prone to systemic crises more than a capital market-based financial sector," Iwasaki said.

He urged the region to "expeditiously implement" its unprecedented "Asian Bond Market Initiatives," which include promoting cross-border bond issues.

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