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Philippines: Arroyo and the proposed crisis fund

Updated On: Oct 29, 2008

The news first broke from Manila on 15 Oct 2008 that Filipino President Gloria Arroyo declared that Southeast Asian nations, backed by Japan, China and South Korea, have agreed to set up a multi-billion dollar fund to buy toxic debt and help to recapitalize the region's banks and private companies. She also claimed that the World Bank has committed to initially provide $10 billion to the fund.

President Arroyo claimed that the plans were drawn up at the World Bank/IMF meetings in Washington in the week preceding 15 Oct 2008. President Arroyo also added her own interpretation of the fund. She continued elaborating the World Bank and the IMF, with the help of ASEAN finance ministers and central bank governors, would draft the implementing mechanism for disbursing funds and, in her view, hopefully with minimal conditions attached.

Arroyo's announcement was followed by her Trade Secretary. Arroyo’s Trade Secretary Peter Favilla said on 16 Oct 2008 Thursday to offer some clarification that the World Bank was working on a facility to provide liquidity to troubled countries around the world, although it had earlier discussed contributing $ 10 billion to an ASEAN fund. He threw further confusion into the issue when he noted that the World Bank was actually looking at providing the funds on a Bank-wide global facility and that it appeared the initiative is not solely for ASEAN. In his view, the World Bank is now shifting the discussions from a regional facility to a bilateral.

But, the Arroyo announcement and her Trade Secretary's comment were greeted with puzzlement, caution and confusion from different quarters. The Asian Development Bank (ADB) said it was too early to talk of contributions to the facility because the region remain strong. Analysts said there was no immediate need to recapitalize banks or companies in Asia as few were exposed to the crisis in the West. On 17 oct 2008, a World Bank official said the bank has no plans to contribute to the fund, and the Asian Development Bank (ADB) said it was too early to talk of contributions because the region was economically sound and in no imminent danger from global turmoil.

It was also unclear why Arroyo made the announcement, rather than Thailand, the current chairman of ASEAN although there were speculation fueled by a Thai official who said it could be because of political problems in the country.

Analysts offered possible explanations for the Arroyo announcement, stating she could have been misinformed, or had jumped the gun on what was basically a scenario exercise. Others in the Filipino academia claimed that such an initiative might have existed by Arroyo had jumped the gun on the announcements before it was made by other leaders. Some also pointed to the premature timing of Arroyo's announcement, which may have taken hints from South Korea's suggestion of a new international organization mandated to address cross-border economic issues such as the current financial crisis.

At the outset of this announcement, it was unclear if this initiative is different from the agreements by East Asian countries earlier in 2008 which proposed an $80 billion currency swap agreement, expanding a much more modest agreement that was set up in the wake of the 1997/98 Asian financial crisis to protect any country facing a balance of payments crisis. Some see this expansion of reserve pooling scheme as a step closer to creating a full-scale Asian monetary fund, which has gained support in Asia as the financial turmoil dampens growth.That scheme which Arroyo coined as Chiang Mai 2 will replace the existing arrangement of mainly bilateral currency swaps formed after the 1997-98 Asian financial crisis, known as the Chiang Mai Initiative.

The annual meeting Asia-Europe summit Oct 24-25 in Beijing became the first real opportunity to clear Arroyo's remarks once and for all. 13 East and Southeast Asian nations agreed on 24 ot 2008 Friday to an $80-billion pool of central bank swap lines. It became the first major coordinated regional action since the full force of the financial turmoil erupted last month.

The Korean government added more details to the initiative. The fund is scheduled to be established by the end of 2009's first half and establish an independent regional financial market surveillance organisation. But confusingly, reports by the international media indicated that this "ASEAN Plus Three" fund would supersede the Chiang Mai Initiative, which came into being in 2000 in the wake of the 1997/98 East Asian financial crisis to ease mainly bilateral currency swaps.

With this international media report, the Chiang Mai initiative, Chiang Mai 2 and the "ASEAN Plus Three" crisis fund then begins to be confusingly discussed interchangeably. In accordance with international media report, in May 2008 East Asian nations reached preliminary agreement to create a foreign exchange reserve pool of 80 billion dollars. In addition, the initial agreement called for South Korea, Japan and China to provide 80 percent or 64 billion dollars, with ASEAN members providing the remaining 16 billion.

The Korean media further added disagrements continued between South Korea, China and Japan on cost-sharing and the way the fund would be managed, quoting a annonymous top aide to President Lee as saying. And according to this aide, the three countries have now ironed out their differences in Beijing, paving the way for an early creation of the new Asian monetary fund.

After the summit, President Gloria Macapagal-Arroyo on 26 Oct 2008 Sunday added further comments that she wanted a December summit of Asian powers to ease conditions on a regional financial support arrangement and to bring forward its launch to counter global economic woes.

Arroyo also said she also wanted leaders to ease conditions on the use of the pool, 80 percent of which is tied to stringent conditions of the International Monetary Fund. She wanted a less cumbersome multilateralized system that can facilitate a quicker dispersing of funds to be implemented sooner, rather than later. In her view, anything less than that may be too difficult for an economy that is in trouble to access on time. She also proposed that the scheme’s launch be brought forward to December 2008, when the Association of South East Asian Nations (ASEAN) member states will hold a summit with China, Japan and South Korea.

In the final analysis, one interpretation of the so-called "ASEAN Plus Three"/Chiang Mai initiatives is that, strictly speaking the Chiang Mai initiative is meant for currency swap in case any currency or a group of currencies of the ASEAN + 3 countries is under severe pressure (as was the case in 1997). In a broader context, the Chiang Mai initiative for financial and monetary cooperation can be interpreted to be used to stabilize financial instability in the region. There is no specific mention for bailing out banks. It is very much at the discretion of ASEAN Plus Three policy makers (Ministries of Finance and Central Banks) what financial and monetary policy are needed to stabilize financial crisis.

Arroyo’s views have not been officially endorsed by ASEAN and remains Philippines’ proposed points at the moment. Anticipating opposition, the Filipino media noted that Ms Arroyo’s proposal could easily be resisted by other members of ASEAN+3 that are wary of putting their funds at greater risk but she appeared eager to lobby China as a potential backer.

Sources:

AFP, “East Asia to create 80 bln dlr fund, US sees deeper woes” dated 24 Oct 2008 in the Yahoo Singapore website [downloaded on 27 Oct 2008], available athttp://sg.news.yahoo.com/afp/20081024/tts-finance-economy-world-c1b2fc3....

AFP, “Stock markets in free fall on gathering global gloom” dated 24 Oct 2008 in Singapore Yahoo website [downloaded on 27 Oct 2008], available athttp://sg.news.yahoo.com/afp/20081024/tts-stocks-world-c1b2fc3.html

Gopalakrishnan, Raju, "ASEAN crisis fund clarified" dated 17 Oct 2008 in Manila Bulletin, available at http://www.mb.com.ph/MAIN20081017138245.html  

Philippines Daily Inquirer, "Arroyo wants quick Asian action" dated 27 Oct 2008 in the Philippines Inquirer website [downloaded on 27 Oct 2008], available at http://newsinfo.inquirer.net/inquirerheadlines/nation/view/20081027-1686...

Reuters, "Southeast Asia to set up crisis fund, says Arroyo" dated 15 Oct 2008 in the Reuters website [downloaded on 18 oct 2008], available athttp://www.reuters.com/article/GCA-CreditCrisis/idUSTRE49E1YJ20081015?







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