Asia has clearly not been spared from the global economic slump and dislocations, particularly post the Lehman Brothers collapse in September 2008 when global credit markets seized and risk aversion shot through the roof and there was an indiscriminate and disorderly sell-off of assets worldwide. However, the large international reserve holdings in Asia, the region’s relatively more flexible exchange rates, the lower levels of leverage—especially with regard to external short-term foreign currency debt in the region—along with stronger balance sheets of Asian corporates and financial institutions, all seem to have worked in tandem to ensure that the capital account shock did not have any long-lasting effects on Asia this time, unlike in 1997-98. The crisis has, however, once again brought to the forefront the importance of intensifying regional monetary and financial cooperation.
The Chiang-Mai Initiative
Since the severe regional crisis of 1997-98, Asian countries have, with some exceptions, chosen to maintain fairly open capital accounts but have recognised that they need to buttress their own reserve holdings considerably with external liquidity arrangements. Against this background, and recognising that financial stability has the characteristics of a regional public good, it is understandable that Asian countries have been eager to promote regional monetary cooperation. The Chiang-Mai Initiative (CMI) has taken centrestage in this regard. As far back as the 8th APT’s finance ministers’ meeting in Istanbul in
May 2005, there was an agreement to re-evaluate the process, including the possibility of regionalising the arrangements. As part of this, there was an agreement to explore the feasibility of developing a collective mechanism to activate the swaps. There was also recognition of the need to expand the scope and extent of regional dialogue and surveillance and link these more closely and effectively to the CMI.
Despite this, though, there was not much forward movement on these issues until recently. This situation changed when, in the latest meeting of APT (Asia plus Three) finance ministers in Phuket, Thailand, in April 2009, APT countries finally reached an agreement to transform existing bilateral arrangements into a regional foreign reserve pool