A pledge among Asian financial officials to create a pool of resources worth 120 billion U.S. dollars to defend regional currencies could lead to the creation of an Asian monetary fund, Chinese economists said this week.

The pool, which is expected to be approved this weekend, would draw on the foreign-exchange reserves of 13 Asian countries.

The finance ministers of the 10 members of the Association of Southeast Asian Nations (ASEAN), plus China, Japan and the Republic of Korea (ROK), agreed Sunday to create the foreign-exchange reserves pool to address liquidity shortages.

The ministers increased the original proposal of 80 billion dollars by 50 percent.

The proposal will be presented to the 14th ASEAN summit in Thailand, which began Friday and will end Sunday.

If approved, the pool will build upon the Chiang Mai Initiative (CMI), a bilateral currency swap network launched in 2000 among the same 13 countries. The CMI was created to help Asian countries fight the kind of currency attacks seen in the Asian financial crisis of the late 1990s.

"It's progress to advance from a group of bilateral pacts to a multilateral reserve pool," Yu Yongding, head of the Institute of World Economics and Politics with the Chinese Academy of Social Sciences, told Xinhua.

"The next step is probably to set up a regional monetary fund."

As of the end of April 2008, there were 16 bilateral swap agreements signed under the CMI, with a total value of 84 billion dollars, according to China's Ministry of Finance (MOF).

HOW IT WILL WORK

With the reserve pool, member countries will manage their own foreign reserves. This will differ from organizations such as the International Monetary Fund, which has its own funds contributed by member states.

When a currency crisis occurs, the reserves can be collectively used for short-term loans for countries in need, the MOF said.

However, the pool could see its impact reduced because of its relatively small size and diffuse management, said analyst Yuan Yongrui of China Forex Online, a Shanghai-based forex information website.

"The larger pool will better arm Asian economies against liquidity risks, but the sum is definitely not enough," he said.

During the Asian financial crisis, the hardest-hit countries of Thailand, Indonesia, the Philippines and the ROK sought more than 100 billion dollars of loans from the IMF to supplement their foreign reserves, which were drained in the battle against massive capital outflows.

"International capital is flowing much faster nowadays, since Asian financial markets have become more open during globalization," said Yuan. He noted that a crisis now could have much more impact than that of 1997.

The IMF's latest forecast for Asian economic growth is to slow to 2.7 percent year-on-year in 2009, only about half its earlier forecast of 4.9 percent.

MORE RISK, GREATER RESOURCES

But although a crisis could cause more pain now, Asian countries are also more prepared and in a better position to fend off a currency crisis. They could use the reserves they amassed in the past decade, said Yuan.

Aggregate foreign-exchange reserves of the 13 countries had reached 3.6 trillion dollars, more than half of the world's total, Thai Prime Minister Abhisit Vejjajiva said at the meeting of the 13 countries' finance ministers in Phuket, Thailand, on Sunday. More than half that amount was held by China.

Another limitation was the inability to assess the need for funds, Yuan added. The CMI arrangements, for example, are linked to IMF lending programs for just that reason. The IMF conducts its own evaluations of countries' needs for funds before extending a loan.

Under current CMI pacts, only 20 percent of the amounts can be used without being subject to conditions that the IMF would impose.

During the Asia crisis, the IMF required borrowers to take steps such as raising interest rates and cutting government spending to stabilize the balance of payments quickly. Economists argued the conditions were too harsh and actually worsened the condition of weak economies.

Facing the challenges of the global financial crisis, Asian countries now especially need their own monetary fund, which can forge closer ties and better serve regional needs, said Yuan.

MONITORING MECHANISM

The 13 countries pledged Sunday to establish an independent unit to monitor the regional economy. After a sound monitoring mechanism is in place, then lending without reference to the IMF could increase, they agreed.

The idea of an Asian Monetary Fund (AMF) was first proposed by Japan in the aftermath of the Asia crisis, when the IMF came under fire for not doing enough.

However, the proposal lacked support from some countries, including the United States, which has the largest voting rights in the IMF.

"The AMF idea still has strong relevance today," said Yuan.

Yu said a regional monetary fund would benefit Asia but might encounter opposition from the United States, which wouldn't want to see the influence of the U.S. dollar reduced.

He said Japan's position would be a crucial force.

"It's not only an economic but also a political issue," said Yu.

It would be very difficult to achieve without political trust and responsibility sharing among Asian countries, he said.

Source:Xinhua