We have already seen turmoil in Turkey and in Argentina, which has secured a record $57 billion program pledge from the IMF. In Asia, Pakistan is negotiating IMF financial support of around $7 billion.
In principle, Asia has a support instrument of its own -- the Chiang Mai Initiative Multilateralization (CMIM), a multilateral currency swap agreement between ASEAN plus China, Japan and South Korea, set up in 2010. This can help a lot because Asia is between a rock and a hard place.
It can be argued that these are especially vulnerable countries, and so were the first to be exposed when U.S. monetary conditions tightened. But these conditions also pose a challenge for more robust countries. Indonesia, for instance, is grappling with the rupiah at the lowest levels against the dollar since 1997.
In principle, Asia has a support instrument of its own -- the Chiang Mai Initiative Multilateralization (CMIM), a multilateral currency swap agreement between ASEAN plus China, Japan and South Korea, set up in 2010.
This relies on a $240 billion financial safety net that can be deploy in the event of balance of payments and short-term liquidity problems. In practice, however, CMIM has not been put to a test, so it is not clear whether it has the operational capacity to intervene in a quick and credible way. Above all, it is not clear whether it has enough resources to fend off financial instability other than small, localized episodes. Asia is between a rock and a hard place.
Each CMIM member can count on a swap line up to a maximum amount calculated on the basis of the country's GDP; of this only 30% can be withdrawn without a linked IMF program.
Indonesia, for instance, can withdraw up to $22.76 billion, but only $6.8 billion would be available without the IMF. With the external debt of approximately $340 billion (or 34% of GDP), Indonesia is too big for CMIM. Similarly, South Korea would have about $11 billion under CMIM without the IMF; during the global financial crisis it relied on a $30 billion swap arrangement with the U.S. Fed, of which 16.35 billion dollars were withdrawn.
So Asia is between a rock and a hard place. CMIM can deal with small episodes of financial instability and provide emergency liquidity. But it would find much harder to manage a regional crisis without involving the IMF. The solution is to increase the resources available to CMIM to manage a protracted liquidity crisis, though still leaving complex multiyear rescue programs to the IMF.
(source: Nikkei Asia Review)