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Philippine's Arroyo: Establishing a crisis fund?

Updated On: Oct 20, 2008

According to Filipino President Arroyo, ASEAN nations have secured the political and economic muscles of Japan, China and South Korea to establish a multi-billion dollar fund to buy bad debt and bail out East Asia's banks that are affected hit by the financial crisis. To this proposal, the World Bank has committed US$10 billion but the Asian Development Bank (ADB) is taking a wait and see approach to see if the crisis would worsen.

If this is true, ASEAN nations ought to be lauded for this as it is now proactive in combating financial crises after experiencing the Asian Financial Crisis in 1997. ASEAN nations together with their Northeast Asian counterparts have taken this move fast despite the fact that their fundamentals remain strong. Toxic debts are minimal compared to those of the US. Asian banks remains less expose to the external crisis in the West - so far.  

If materialized, this initiative gives a boost to global efforts to recapitalize the financial market with states in the world pledging US$3.2 trillion so far in various forms to combat the worst crisis since the Great Depression. This fund will go a long way in boosting the confidence of the regional investors and markets.

According to President Arroyo’s statement, the World Bank and the IMF are working close with ASEAN finance ministers and central bank governors to construct the mechanism for distributing the funds and the conditions attached to the funds. Many in East Asia hope that the conditions will not be onerous.

However, signs that details are still yet to be inked are evidenced from widespread confusion after President Arroyo’s announcement as countries and institutions were unaware of this plan. Manila was abuzz with speculation that President Arroyo could have been misinformed, or prematurely announced what was a scenario exercise instead of a full-fledged initiative.

A World Bank official immediately clarified that it has no plans to contribute to the fund, and the Asian Development Bank (ADB) maintained that fundamentals were stable in the region. The loan-to-deposit ratio of most Asian banks is around 80 percent, according to Merrill Lynch data and thus the banks are solvent and can pay depositors easily.

Arroyo’s Trade Secretary Peter Favilla then clarified by stating that the World Bank was working on a facility to provide liquidity to troubled countries globally even though it had had earlier discussed the contribution of $ 10 billion to an ASEAN fund. In other words, it is a global and not a regional fund.

 

Sources:

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

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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