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Financial Sector Legal and Regulatory Toolkit : Part Four: Regional Financial Integration
III. Chiang Mai InitiativeRegional monetary cooperation is mainly evidenced by short-term ASEAN+3 central bank credit lines. The 2000 ASEAN+3 Chiang Mai Initiative (CMI) sought to promote cooperation through the institution of bilateral currency swap agreements among central banks (ASEAN 2000). Today’s network of bilateral credit lines has two roots, collaborative foreign exchange swap lines set up by ASEAN’s five original members, and a series of securities repurchase (repo) lines initiated by the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP)1 as a precaution after the 1994 Mexican financial crisis (Moreno 1997, 97–100). These origins also reveal two aims, the first political in showing the group’s robustness, and the second intended to assist in economic policy. ASEAN’s arrangement began in 1977 as a modest $100 million set of foreign exchange swap lines, facilitating simultaneous spot sale and forward purchases of local currency for US dollars among five central banks to assist a member in temporary need of external liquidity. The scheme was extended, expanded, and may have been used once each by Indonesia, Malaysia, the Philippines, and Thailand between 1979 and 1981, and on a second occasion by the Philippines in 1992, in each case for modest amounts (Henning 2002). The arrangement’s limited size and conditionality (requiring a prior IMF arrangement) prevented its use in 1997 when the members’ external positions came most under pressure. With these swap arrangements, came a series of bilateral repurchase lines among EMEAP members, the first introduced in late 1995. Japan was active in their creation, partly due to its interest in promoting regional building blocks distinct from those involving other G-7 members. The lines allowed a participant to raise major currency liquidity for intervention or other purposes by discounting with a fellow member high-grade security held as international reserves, most commonly US government securities. Market practice knows several contexts in which the use of repurchase lines is prolific among both commercial and central banks, but EMEAP’s repurchase lines are analogous to the conduct of money market operations by central banks seeking to influence domestic liquidity, including cases where a central bank accepts collateral in the form of prescribed securities and becomes a lender of last resort. Use of EMEAP lines has no direct consequence for domestic credit expansion. The first repurchase lines were established in 1995–97, prompted by Mexico’s earlier experience and ASEAN’s concerns of contagion. The amounts of these lines were made public only for those involving Japan, each being of $1.0 billion (see Moreno 1997). Excluding those involving Australia and New Zealand, two sets of lines thus evolved into more complex agreements heralded by CMI. This spurred ASEAN members (now a group of ten) to raise their total swap arrangements to $1.0 billion (later $2.0 billion) and for PRC, Japan and Korea each to pledge to maintain bilateral credit lines among themselves and with each ASEAN member, allowing currency swaps and securities repurchases. The initiative is not an agreement but an expression of intent, making ASEAN+3 a catalyst to bilateral arrangements already customary among developed economies. More recently, ASEAN+3 finance ministers have endorsed in principle to augment CMI by creating a new multilateral agreement for the pooling of additional international reserves. This arrangement would involve administrative resources separate from those within participating states and their respective central banks, and is intended to command at least $120 billion in commitments, with the PRC, Japan, and Korea together providing 80% of the total and ASEAN members the remainder. The arrangements would “supplement the existing international financial arrangement”, but in the event that a participating state sought temporary liquidity it is as yet undecided whether conditions for drawings would differ from those of existing multilateral organizations, notably the IMF. The ministers stress that usage would be subject to “rigorous principles”, and there is no sign that ASEAN+3 is inclined to develop distinct conditions for its members. The realization of this proposal would represent the first truly regional arrangement related to monetary cooperation. ___________________
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