The Association of Southeast Asian Nations and its three dialogue partners — Japan, China and South Korea — are near agreement on creating an enhanced multilateral currency swap arrangement in a bid to prevent a recurrence of the 1997 Asian currency crisis, Japanese government sources said Saturday.
The agreement will be reached when finance ministers from the 10 ASEAN members and their three partners gather May 6 in the northern Thai city of Chiang Mai for a meeting of the regional consultative forum called “ASEAN plus 3,” the sources said.
Under the plan, parties will provide dollars in exchange for a local Asian currency whenever the currency comes under selling pressure from hedge funds or other market players, they said.
It is hoped that integrating Japan and China — two of the world’s biggest holders of foreign exchange reserves — into a currency defense regime will scare away speculators from taking on local Asian currencies, they said.
Some participants in the Chiang Mai parley in the late 1990s considered a plan to create a different kind of currency defense regime, called the “Asian Monetary Fund.” They gave up on the idea due to opposition from the United States and some European nations, they said.
Japan proposed the AMF scheme in 1997 as a safety net for stabilizing the Asian economy, which was then being rocked by a sudden flight of short-term investment funds from the region’s securities and currency markets.
Central bank currency swaps are usually concluded bilaterally. Such deals involve providing dollars or other strong currencies to the government of a nation whose currency has come under speculative attacks so it can intervene in the market.
The supporting country swaps strong currencies for the local currency at a fixed exchange rate that shields it from exchange rate risks. In most cases, the strong currencies are returned to their original holder within a few months.
At present, ASEAN members operate their own swap scheme under which up to $200 million can be provided to a nation whose currency is under attack.
But the limited scale of the ASEAN Swap Arrangement has undercut its ability to shield a currency from assault, leading some ASEAN nations to seek aid from Japan and other holders of ample foreign exchange reserves.
Japan has already concluded bilateral currency-swap deals with South Korea and Malaysia, under which a total of $7.5 billion in Japanese reserves has been swapped with those nations’ local currencies.
Japan intends to step up moves to conclude similar swap agreements with other Asian governments, they said.
The ASEAN plus 3 parley is to take place on the sidelines of a plenary meeting of the Asian Development Bank, which will be convened the same day in Chiang Mai.
ASEAN comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.