Asia Agrees on $120 Billion Currency Pool as Crisis Worsens

Feb. 23 (Bloomberg) -- Asian nations will form a $120 billion pool of foreign-exchange reserves that can be used by countries to defend their currencies in an expansion of efforts to battle fallout from the global financial crisis.

Finance ministers from Japan, China, South Korea and 10 Southeast Asian nations agreed to the fund at a summit yesterday in Phuket, Thailand. The amount is 50 percent more than was proposed last May, and a broadening of the current arrangement called the Chiang Mai Initiative that allows only bilateral currency swaps. No date was set for completion of the new pool.

A regional currency agreement is vital “in ensuring market confidence in the Asian economies,” Thailand Finance Minister Korn Chatikavanij told reporters. “It is one of our highest priorities.”

The fund is aimed at ensuring central banks have enough to shield their currencies from speculative attacks such as those that depleted the reserves of Indonesia, Thailand and South Korea during financial crisis a decade ago. Many Asian currencies have tumbled in the past year, threatening regional stability, as the global downturn spreads through their export- dependent economies.

Japan, China and South Korea will provide about 80 percent of the currency pool with the 10 Association of Southeast Asian nations contributing the rest, the statement said. How much each country will supply will probably be decided by the next meeting in May, the ministers said yesterday.

Thailand, Indonesia, Malaysia, Singapore and the Philippines, the five-biggest Southeast Asian nations, will contribute $3.5 billion each to the pool, Malaysia’s state news service Bernama reported, citing Deputy Prime Minister Najib Razak who attended the meeting.

Fund Needed

“The pool will shore up confidence and provide support for these nations in any kind of emergency,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore. “We cannot rule out that some countries will need to tap the fund in this crisis.”

Eight of 10 of Asia’s most-traded currencies outside of Japan have fallen against the dollar in the past year, led by a 37 percent tumble in the Korean won and a 23 percent decline in Indonesia’s rupiah, according to Bloomberg data.

The currencies are at risk of further losses as wealthier nations curb overseas investment and private investors sell existing stock and bond holdings in emerging markets.

“Capital flows into the region have decreased due to global de-leveraging,” the ministers said yesterday.

Risks to Asia

Large reversals “of capital flows, which have affected the financial markets, could undermine growth prospects,” they said. “This can be a significant downside risk to regional growth, which has already been dragged down by the global economic downturn.”

A decade ago, Indonesia, Thailand and South Korea spent much of their foreign reserves attempting to prop up their exchange rates. The three nations were forced to turn to the International Monetary Fund for more than $100 billion of loans. In return, the governments had to cut spending, raise interest rates and sell state-owned companies.

In the years since, Japan, China and South Korea together with the Asean economies have amassed more than $3.6 trillion of foreign-exchange reserves, about half of the global total.

“We reaffirm our determination to dedicate ourselves to increasing the free flow of trade and investment, to standing firm against protectionist measures which would worsen the economic downturn and to refrain from raising new barriers,” the Asean ministers said in a statement.

Reserves Decline

Fallout from the current global slump has led to some Asian nations using their reserves to support their currencies.

South Korea’s foreign-currency holdings declined to $202 billion in January from a record $264 billion last March. The nation may use reserves after the won weakened beyond 1,500 per dollar last week, Yonhap News reported yesterday, citing unidentified government and central bank officials.

Malaysia’s gold and foreign-exchange reserves fell to $91.3 billion on Jan. 30 from $123.7 billion on Aug. 15. Indonesia’s have slumped by $10 billion since last July to $50.9 billion at the end of January.

Asian nations are expanding or forging new bilateral currency swap agreements even as they set up the combined reserve pool. Japan and Indonesia on Feb. 21 agreed to boost the size of an existing bilateral agreement to $12 billion from $6 billion. China and Malaysia this month agreed on a three-year 80 billion-yuan ($11.7 billion) currency swap.

“As an interim measure, the existing bilateral swap agreement network should play its full role and be strengthened in terms of size and participants if necessary,” the Asian ministers said.