Asia's doubling of its financial safety net, agreed to at the ASEAN conference in Phnom Penh in March, looks impressive. But it’s more icing than cake. It is, in fact, unusable.
There is no fund, just a series of promises; the institutional mechanisms to replace IMF-style surveillance and conditionality have not been established; and there are no procedures to handle a sudden financial emergency.
With much fanfare, three East Asian (China, Korea and Japan) and 10 Southeast Asian finance ministers — or ASEAN+3 — last month announced a package of initiatives designed to ensure their economies do not succumb to another balance-of-payments crisis.
They relate to the Chiang Mai Initiative Multilateralisation (CMIM), a self-managed reserve-pooling mechanism for member economies.
The new arrangements double its size to $240 billion, and increase the threshold before IMF involvement from 20 to 30 per cent of a country’s quota.
The implementing agency, the ASEAN+3 Macroeconomic Research Office (AMRO), is already up and running.
This looks impressive in contrast to the European imbroglio and the shaky US position, but look deeper and the achievements are less impressive.
ASEAN+3 may appear to have its own regional insurance, but in practice it doesn’t. In the event of another crisis, it would be back to a series of ad hoc bilateral swaps or the much-maligned IMF.
This is a controversial assertion — particularly with ASEAN+3. But a brief look at the history of the CMIM and the agreement’s fine print proves the point. It also reveals some of the things that need to be fixed.
The CMIM evolved from the 1997-98 Asian financial crisis, and the IMF’s management of it. The IMF quickly became extremely unpopular, not just for the prescribed bitter medicine in Indonesia, Korea and Thailand, but also for having misdiagnosed the problems.
The result was a resurgence of nationalist sentiment. Japan proposed an alternative ‘Asian Monetary Fund’ but neglected to consult China first, so there was insufficient regional support to counter predictable US opposition.
Notwithstanding this, the first step was taken soon afterwards with the CMI in May, 2000.
The CMI’s first test came in September, 2008 when, after the Lehman Brothers collapse, short-term capital quickly exited emerging economies.
But the CMI was unusable. Given its small size and absence of rapid-response mechanisms, affected countries resorted to bilateral swaps with the US, Japan, Australia and the multilaterals.
Realising its impotence, ASEAN+3 replaced the series of bilateral swaps (CMI) with a single agreement (CMIM) in December, 2009, and established AMRO in May, 2011.
But it’s still unlikely the CMIM will ever be used as long as it is linked to the IMF. How can you remove the IMF stigma if access to the lion’s share of your quota requires an IMF program?
The recent introduction of a precautionary credit line is also unattractive because it retains the IMF link. If ASEAN+3 is serious about financial safety nets, it should do three things.
First, AMRO needs to be reformed. It has no funds to disburse, as pooled contributions remain in national coffers.
It must also build a strong, credible and independent surveillance capacity, of the stature the IMF arguably possesses.
This will allow it to determine whether a country in crisis is insolvent or illiquid. At present, the CMIM is designed only to deal with a liquidity crisis.
Second, swap quotas are inadequate for all but the smallest members. During 1997-98, $40 to 60 billion in emergency liquidity was needed by each crisis-hit country.
Yet the original ASEAN members can access $23 billion each, and 30 per cent of it without an IMF program.
For ASEAN’s newer, smaller members, the full quotas are a substantial share of individual reserves,but may still be insufficient for a bailout.
Cambodia’s contribution of $240 million enables it to borrow five times that amount, but only $360 million if it wants to avoid signing on to an IMF program.
As of February, Cambodia’s total reserves (less gold) stood at $3.64 billion, which is more than three times its borrowing limit with the CMIM.
Should a crisis strike, and given the small size of its country quota as a share of its reserves, Cambodia could either rely on its own reserves or would need to go beyond the CMIM, depending on the severity of the crisis.
That the CMIM was never intended for use by its biggest contributors — China, Japan and Korea — is reinforced by the bilateral swaps between themselves announced virtually in tandem with the doubling of the CMIM.
Third, they should broaden membership, regardless of how complicated that might be. This could enlarge and diversify the fund, from countries less connected to East Asian business cycles.
The obvious candidates would be those originally joining ASEAN+3 in the East Asian Summit: Australia, New Zealand and India.
Although all three reforms are desirable, they are not equally important. If AMRO could gain credibility, the small size or membership of the CMIM would be less constraining.
Even the IMF relied on other partners to fund the bail-out in Asia and now Europe. But the IMF led the rescue and set the terms, and this is what matters. AMRO needs to be able to do the same.
Without these changes, ASEAN+3 has nowhere else to go if crisis strikes — which explains why countries self-insure with excessive reserves.
If ASEAN+3 wants a co-financing facility with the IMF, it has one in the CMIM. But if it wants its own regional safety net, it has a long way to go.
The hope is that by highlighting the flaws in the CMIM’s design, they may be fixed before, rather than because of, the next crisis.