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Source: www.asiaecon.org |

ASIA AGREES ON $120 BILLION CURRENCY POOL


In an attempt to battle fallout from the global financial crisis, Japan, China, South Korea and 10 Southeast Asian nations agreed to form a $120 billion pool of foreign-exchange reserves as a defense for their currencies. This is more than 50 percent than that proposed last May, and still no date has been set for the completion of the new pool.


In an attempt to battle fallout from the global financial crisis, Japan, China, South Korea and 10 Southeast Asian nations agreed to form a $120 billion pool of foreign-exchange reserves as a defense for their currencies.  This is more than 50 percent than that proposed last May, and still no date has been set for the completion of the new pool. 

The foreign-exchange reserves may help shield the currencies of central banks from speculative attacks which could threaten the stability of the reserves.

Sebastien Barbe, a strategist at Calyon in Hong Kong, stated, “This fund is not aimed at avoiding a region-wide simultaneous depreciation, the aim is to avoid a currency crisis if one or two member countries are under extreme pressure, then the fund can be used to avoid a currency crisis”.

The vast majority of the pool will be contributed by China, Japan and South Korea, a cumulative 80 percent, while the remaining 20 percent will be made up by the other 10 Southeast Asian nations.  The exact contributions per country will not be decided until next May.  However, Thailand, Indonesia, Malaysia, Singapore and the Philippines reported that they will each contribute $3.5 billion (I assume this is US dollars).

The new initiative is expected to reduce the amount that borrowing is linked to conditions in the International Monetary Fund’s lending program. “If the objective is to ensure the region against the significant structural adjustments, they need to move away from the IMF conditionality,” stated Richard Yetsenga, Asia currency strategist at HSBC Holdings Plc in Hong Kong.

Eight out of the ten most-traded Asian currencies outside of Japan have fallen against the dollar in the past year.  As private investors sell existing stock and bond holdings and as wealthier nations curb overseas investment in emerging markets, the currencies are at risk of inducting further losses.

Adding to the already unsteady economic climate, “Capital flows into the region have decreased due to global de-leveraging,” the ministers said yesterday.  These decreases have affected the financial markets and could substantially undermine growth prospects.

Ten years ago Indonesia, Thailand and South Korea were forced to take over $100 billion in loans from the IMF after attempting to prop up their exchange rates using their foreign reserves.

Since then, Japan, China and South Korea have amassed more than 3.6 trillion of foreign-exchange reserves, which accounts for almost half of the global total.

As the current global slump continues, some Asian nations have used the foreign reserves in order to bolster their currencies.  South Korea is willing to add to a bank recapitalization fund in order to support the won should the economic situation worsen.

Even as the reserve pool is being set up, bilateral currency swap agreements are being announced.  On Feb. 21, Japan and Indonesia agreed to boost their current agreement from 6 billion to 12 billion.  Similarly, China and Malaysia this month agreed upon an 80 billion three-year currency swap. 

“As an interim measure, the existing bilateral swap agreement network should play its full role and be strengthened in terms of size and participants if necessary,” the Asian ministers said.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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