from Follow the Money

Is the balance of financial power shifting?

May 8, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The IMF has about $200 billion that it can lend out. About $75 b is currently lent out, mostly to Brazil, Turkey and Argentina (data link), leaving a bit over $100 billion that could be lent out in an emergency.

Japan has about $800 billion in reserves, four times as much money as the Fund. China is rapidly heading toward Japan’s level. Taiwan and Korea both have over $200 billion in reserves. Singapore and Hong Kong (tiny city states) have over $100 billion. They all have more reserves than they need, meaning that some of their surplus reserves could be lent out to help other countries short on reserves.

That is the basic idea behind Asian currency swaps: a country in trouble swaps its currency for the hard currency reserves of another country. That effectively is a loan, similar to an IMF loan. The country that feels it needs more reserves gets more reserves.

Right now, about $36 billion is available through this swap arrangement; and there is talk of doubling it. After all, there is no shortage of reserves in Asia.

That leads to the obvious question about Asian regional monetary cooperation: who in the region might actually need the money? Korea has enough reserves of its own so that it won’t have to turn to Japan or China. Malaysia and Thailand are in a similar position. Right now, there are more lenders than there are potential borrowers inside East Asia.

But there still are a few possible borrowers. The Philippines is not a financial rock, and Indonesia’s domestic and external debt load remains quite substantial.

The other question is who would decide what type of conditions would be attached to any loan. Both China and Japan -- for obvious political and historical reasons -- don’t relish imposing austere economic policies on other Asian economies. Yet they also want to get any money they lend back; they would be unlikely to lend to say the Philippines without a commitment from the Philippines to raise additional revenues/ pare back its fiscal deficit.

Right now, access to the network of Asian currency swaps still hinges on an IMF program -- East Asia in this case has outsourced its dirty work to a DC based multilateral institution. William Pesek supplies the key quote:

Yet Kawai agrees ``full IMF delinkage would not be desirable at this point.’’ One reason: Nations involved in the Chiang Mai Initiative don’t have the bureaucratic infrastructure to conduct the kinds of economic surveillance and data collection done by the IMF.

Similarly, talk of recycling more Asian savings inside Asia runs well ahead of the current reality. The Asian bond fund’s $3 billion pales in comparison with the roughly $2.5 trillion Asian central banks hold in reserves. Recycling savings inside Asia requires Asian borrowers as well as Asian lenders. That is a bit hard when the region’s natural borrower -- a very large, still quite poor country that is in the midst of an investment boom -- is adding to its reserves, and lending to the rest of world, not borrowing from it.

Still, it feels like something is changing -- and not just because of talk that the Asian currency swap arrangement is a proto-Asian Monetary Fund. If East Asia puts up the bulk of the money the next time an Asian economy gets into trouble, I suspect the IMF will pay more attention to Asian views on the appropriate nature of IMF conditionality. I don’t agree with every Asian complaints about how the IMF handled the last crisis (a topic for another day) but there is little doubt that Asia is egregiously underrepresented on the IMF board. Unless Asia feels like the IMF does a decent job of reflecting its growing financial power, there is a risk that Asia may in some meaningful sense (though probably not in any formal sense) opt out of the IMF. Let’s jump way, way ahead and engage in a bit of wild speculation.

Suppose Brazil were to get into financial trouble again. Its economic relationship with China has deepened considerably over the past few years. Iron ore and soybean exports to China have fueled is post 2002 recovery and China is increasingly interested in investing in Brazil.

Would China also be willing to come to the rescue if Brazil needed to supplement its reserves? Would it be willing to lend out its reserves on less stringent terms than the IMF? Would it be willing to supplement the IMF’s own resources with a bilateral loan (the US as a matter of policy now disapproves of supplemental bilateral packages)? And if so, how much say would it expect over the IMF’s conditions? More Beijing consensus, less Washington consensus?

Remember, it was the US decision to provide a large bilateral bailout to Mexico that pushed the IMF to expand the size of its lending to crisis countries. The IMF wanted to remain relevant -- and it worried that if most of the money came straight from the U.S. Treasury, the IMF’s relative influence would wane.

No doubt this speculation jumps far ahead of the current reality. But with so many dollars sitting in East Asia, the United States -- or even the IMF -- is no longer the only place to look if you are an emerging economy that is running short on dollar reserves.

Indeed, the actual foreign exchange reserves of the US government seem quite puny relative to the vast stockpiles in Asia. $40 billion in bank deposits and marketable securities sounds like a lot, but it is far less than say Thailand has on hand. Of course, if the US really needed money, it could always go out into the market and borrow it ...

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