Cablegate: Backgrounder On the Chiang Mai Initiative

DE RUEHGP #0947/01 2490202
R 050202Z SEP 08





E.O. 12958: N/A


1. (SBU) Summary: In Vietnam's recent balance of payments
episode, analysts in Singapore and around the region tried to
draw comfort from potential loans from one of Asia's premier
post-Asian financial crisis programs: the Chiang Mai
Initiative (CMI). However, analyst confusion over how the CMI
would work --- and how much it could help a country in trouble
--- highlighted the need for more transparency for the
initiative to prevent market volatility and moral hazard. The
CMI started as a network of bilateral swaps launched by the
ASEAN Plus Three Finance Ministers (the 10 member of ASEAN
plus China, Korea and Japan). Its purpose was to address
short-term liquidity problems within the region by providing
quick disbursement of 20 percent of the available swap lines
while the remaining 80 percent of the funds would supplement
an IMF program. While the CMI has grown and recently evolved
from a bilateral swap arrangement (BSA) into multilateral
framework, there is still much uncertainty in the market and
among policy makers about its structure. Key questions
include: the dollar amounts available, activation methods,
repayment terms, modes of surveillance and whether the 20/80
IMF link will be maintained. End Summary.

Looking for loans in all the wrong places

2. (SBU) In April/May 2008, when there was a fear that Vietnam
was facing a balance of payment crisis, the analyst community
in Singapore and around the region tried to estimate the
potential foreign exchange resources the country had at its
disposal to avoid currency devaluation and continue making
international payments. Analysts turned to the CMI, a
regional initiative created after the Asian financial crisis
to help disburse money quickly to Asian countries in need and
to supplement the resources available under the usual IMF
economic adjustment programs.

3. (SBU) Analysts produced vastly different estimates of what
the CMI could offer to help Vietnam. The estimates ranged
from $2 billion (JP Morgan) to $50 billion (Morgan Stanley),
all of which were off the mark, as Vietnam only had access for
a few hundred million dollars from an ASEAN arrangement (see
below) and nothing from the CMI. Singapore-based analysts
made frantic inquiries to Post about the terms of this
program. The lack of transparency is a worry as it provides a
false sense of security to the markets and may contribute to
reckless behavior, moral hazard, or delay of needed economic
adjustment. Reactions could be volatile when the markets
realize that the coverage afforded by the CMI is less than
what the market has estimated or based on different terms.
This episode reinforces the need for more clarity and
transparency on the CMI.

Swaps expand from ASEAN to ASEAN Plus Three

4. (U) Swap arrangements in Asia have a long history: the
original five ASEAN members (Thailand, Indonesia, Malaysia,
Singapore and Philippines) started their own ASEAN Swap
Arrangement (ASA) in 1977. Under the ASA, members were
allowed to exchange their local currencies for U.S. dollars on
a short-term basis to alleviate "temporary international
liquidity problems." ASA was eventually extended to the
newer members of ASEAN and was enlarged from $100 million to
$1 billion in 2000, and to $2 billion in 2005. Under the ASA,
ASEAN contributors can withdraw support up to two times the
amount they contributed to the program.

5. (U) In May 2000, the ASEAN Plus Three Finance Ministers
announced the establishment of the CMI, a network of bilateral
swap arrangements (BSA) among ASEAN countries and their three
dialogue partners, China, Japan and South Korea. The goal of
the CMI was also to supplement the existing international
financial arrangements (such as the IMF and the ASA) with a
regional swap arrangement that brought in northern Asian
countries with larger foreign exchange reserves than their
ASEAN neighbors.

6. (SBU) Theoretically, the CMI provides for 33 bilateral
currency swap agreements to be negotiated, namely 30 BSA
between each of the 10 members of ASEAN and China, Japan and

SINGAPORE 00000947 002 OF 003

South Korea respectively, and three arrangements among China,
Japan and South Korea themselves. However, the actual number
of swap lines negotiated among the ASEAN Plus Three so far is
16 and these were concluded among eight countries, namely
China, Indonesia, Japan, Malaysia, Philippines, Singapore,
South Korea and Thailand. Ten of the agreements are two-way
(i.e. they commit to help each other) and six are only one-way
(i.e. Japan, China or Korea commit to help the other country,
which is under no obligation to return the favor.) The
overall size of these 16 BSAs inches up every year, reaching
$83 billion as of May 2008. (see table 1.) One Singaporean
official admitted that there was much pressure to demonstrate
the "political momentum" of the CMI by increasing the size of
the bilateral swaps at each annual ASEAN Plus Three Finance
Ministers meeting, even if just a token increase.

7. (SBU) However, as highlighted in the Vietnam case, not all
countries have been able to participate. To date, only the
more developed members of ASEAN have completed any BSAs. With
the exception of Brunei, the late-comers to ASEAN, namely
Cambodia, Laos, Burma and Vietnam, are not a party to any BSA
with China, Japan or South Korea. According to a report by
the Institute of International Economics, this could be
because the poorer members of ASEAN, with less-developed
financial institutions, are better served by concessionary
foreign aid than BSA. (Note: as Singaporean monetary
authorities have pointed out, the lack of a CMI-sanctioned
swap deal would not prevent an Asian country from helping out
its neighbor in times of need. Many analysts, for example,
speculated that Singapore or China would lend to the
Vietnamese. Market participants and government officials
believed that Vietnamese officials made trips to Beijing,
Tokyo and Seoul in search of such assurances, despite their
lack of any BSA under CMI.)

Table 1. BSAs under the CMI as of May 2008
Agreements Amount Agreements Amount
($ billions) ($ billions)
---------- ----------- ---------- -----------
1. Japan-China 3 9. Japan-Korea 13
China-Japan 3 Korea-Japan 8

2. Japan-Indonesia 6 10. Japan-Malaysia 1

3. Japan-Philippines 6 11. Japan-Singapore 3
Philippines-Japan 0.5 Singapore-Japan 1

4. Japan-Thailand 6 12. China-Korea 4
Thailand-Japan 3 Korea-China 4

5. China-Indonesia 4 13. China-Malaysia 1.5

6. China-Philippines 2 14. China-Thailand 2

7. Korea-Indonesia 2 15. Korea-Malaysia 1.5
Indonesia-Korea 2 Malaysia-Korea 1.5

8. Korea-Philippines 1.5 16. Korea-Thailand 1
Philippines-Korea 1.5 Thailand-Korea 1
--------------------------- ----------------------------
Total BSAs: 16 (10 two-way, 6 one-way) Total value 83
-------------------------------------- ----------------
Source: Ministry of Finance, Japan

From Bilateralism to Multilateralism

8. (U) In May 2008, the ASEAN Plus Three Finance Ministers
agreed to work toward replacing the CMI's bilateral swap
network with a multilateral framework known as the CMI
Multilateralization (CMIM). Under the CMIM, central banks
would designate a certain amount of their own foreign exchange
holdings to be included in a "multilateral" fund. While these
funds would remain at the national central banks, access to
the CMIM would be "governed by a single contractual agreement"
in which any country in the framework could draw upon these
funds to cope with short-term liquidity difficulties. Unlike
the bilateral swap arrangements with the "Plus Three"
countries of China, Japan and South Korea, the poorer members
of ASEAN will also be covered by this new facility.

SINGAPORE 00000947 003 OF 003

9. (SBU) After much lobbying from their southeastern
neighbors, the "Plus Three" countries of China, Japan and
South Korea agreed to contribute disproportionately to the
CMIM, providing 80 percent of the funds for the multilateral
facility, which will initially total at least $80 billion.
The remaining 20 percent will be provided by the ASEAN
countries. Senior regional officials have remarked on the
keenness among the Chinese and Malaysians to make the fund
large Q and easy to access Q in order to avoid any dependence
on non-Asian funds, especially the IMF. Some regional
officials, however, argued that an excessively large fund
would create moral hazard.

10. (SBU) Further work on the CMIM remains to be done before
it can become operational. The ASEAN Plus Three countries
have yet to come out with concrete conditions for drawing on
the reserve pool, managing the funds (which will remain at
individual central banks), or repaying the funds. Most
importantly, CMIM needs to develop a mode for economic
surveillance of the participants, which will be vital to avoid
moral hazard and economic instability. Regional officials
have long recognized the shortfalls in ASEAN's regional
surveillance efforts given its non-confrontational style and
reluctance to criticize their neighbors (reftel). One senior
regional official said that a core group of countries
(including Japan, Indonesia, Singapore and Vietnam) expressed
concern that the CMIM will "lose credibility" without a strong
surveillance program, and seem to have effectively put the
breaks on the roll-out of the CMIM until such issues can be

Will the "IMF link" remain?

11. (U) The CMI was a response to the IMF actions and the
nature of conditionality attached to aid during the Asian
financial crisis. Nevertheless, the IMF remained an integral
part of the CMI through the provision referred to as the "IMF
link." Disbursement of the bulk (80 percent) of the CMI swap
lines is dependent on the requesting country participating in
an IMF program. Member countries without an IMF agreement are
currently allowed to borrow only 20 percent of the total funds
they are entitled to withdraw.

12. (U) Under the CMIM, the IMF link is less clear. No
specific mention of the IMF conditionality was made in the
11th ASEAN Plus Three Finance Ministers Meeting statement.
Instead, the ASEAN Plus Three countries strove to strengthen
the Economic Review and Policy Dialogue (ERPD) and to fully
integrate ERPD with the proposed swap facility. Thus, the
ability to link fund disbursement to conditions established
outside of the IMF framework will depend on the ability of the
ASEAN Plus Three members to create an effective monitoring and
surveillance system.

Comment: Concerns about the CMI remain

13. (U) In what one senior regional official recently
commended as a major U.S. policy shift, then-Treasury Under
Secretary for International Affairs Timothy Adams spoke in
favor of regional financial initiatives that promote financial
sector reform and stability. However, he also argued that
"too little is known by the markets or by borrowers about
amounts available absent IMF adjustment programs, and the
conditions, if any, CMI creditors would impose. More clarity
on these issues would aid an assessment of the CMI's
compatibility with the international system." (see June 2005
speech at the World Economic Forum in Tokyo: m). Further
clarification on the CMI/CMIM is needed for it to play a
stabilizing role. Hopefully, until these items are settled,
no country will need to actually call the CMI members' bluff.


© Scoop Media

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