FINANCE-ASIA: U.S., IMF Pressure Sank Bailout Fund

By IPS Correspondents Reprint | | Print |

Analysis - Yojana Sharma

HONG KONG, Nov 21 1997 (IPS) - Pressure from Washington and the International Monetary Fund (IMF) won out in the collapse this week of a 100 billion U.S. dollar ‘Asia Fund’, which was proposed to bail out economies hit by currency speculation.

The United States and the IMF feared a loss of influence over regional monetary policy, Asian analysts say. “The IMF saw a regional fund facility as a potential rival,” said one member of the Hong Kong Monetary Authority, who declined to be named.

He pointed to a tour of the region by IMF managing director Michel Camdessus in recent weeks, in order to lobby governments ahead a two-day meeting of regional finance and central bank officials in Manila that ended Thursday.

According to one argument used by the IMF — which several Asian finance officials criticised as “patronising in the extreme” — at-risk countries may not pursue sound economic policies if they knew they had a cushion to fall back on.

Camdessus indicated that the guidelines of the ‘Asia Fund’ would in all likelihood be “gentler, kinder, softer than an IMF programme” and not rigorous enough to restore the confidence of foreign investors and financial markets, which would be looking for an IMF stamp of approval.

Korea’s announcement Friday that it would seek assistance from the Fund came partly after the realisation that U.S. and Japanese banks would not lend to ease its currency shakedown without an IMF package in place.

The United States government had couched its opposition to a regional fund in more direct terms. It has made it quite clear that “the IMF and World Bank are and must be central to any serious effort to provide international support to these nations as they work their way through this period,” U.S. Treasury Secretary Robert Rubin told businessmen earlier this week.

Behind-the-scenes pressure concentrated on Japan in October and early November. Coupled with Tokyo’s own financial worries, this led to Japan’s decision not to back the plan which became apparent last week, though the idea originated in Tokyo.

In mid-November, a Japanese finance official admitted that “a permanent monetary fund would be financially burdensome, even to economically strong countries”.

Japan’s vice finance minister Eisuke Sakakibara this week as tried to justify abandoning the idea of bailout fund: “The idea that we floated originally was a tentative idea to be debated among member countries, and I think the basic objectives of what Japan pursued has been achieved.”

Few found this convincing. But analysts here say without Japanese financial backing, the fund would be too expensive for Asian countries to maintain. This effectively led to the demise of the Asian fund, which has degenerated from a “fund” to a “standby credit mechanism”.

As a face-saving measure this week, Asian deputy finance ministers, central bank governors and officials from the Fund, World Bank and Asian Development Bank agreed in Manila to develop a “cooperative financing arrangement” under IMF control which would provide additional resources on a case-by-case basis, said a communiqu released in Manila.

Analysts said it amounted to a “vague framework” under which member countries can volunteer credit lines to each other to supplement the limited funds of the IMF, but only after a recipient had agreed to an IMF rehabilitation programme.

The IMF would be in charge of the facility and would call on member nations to join should it deem necessary and in “extreme circumstances”, and only after IMF resources had been brought into play.

“The first line of financing will be provided by the IMF, the second line of financing will be provided by other countries,” IMF managing director Stanley Fischer said this week in Manila.

Analysts said Asian finance ministers only agreed to the IMF role because it became clear that virtually every country in South- east Asia, apart from Hong Kong, Singapore and Brunei, has low reserves or needs what reserves they have should their currencies come under attack.

In Singapore, public pressure may make it more difficult for that government to extend a helping hand to other countries in the region in future after it bailed out Thailand with 1 billion U.S. dollars of taxpayers’ money, and Indonesia with another 5 billion dollars.

Even Malaysian Prime Minister Mahathir Mohamad, who has strongly criticized the IMF for its interventionist methods, last week added his voice to those saying an Asian fund would not be a good idea if it meant duplicating the IMF.

Korea had strongly resisted a deal with the IMF, with finance officials saying as late as two days ago that they would not seek help from the IMF because it would represent a loss of “economic sovereignty”. Seoul said it preferred to seek help directly from U.S. and Japanese banks.

But when it became clear that a regional facility would not be forthcoming and U.S. and Japanese banks refused to lend without an IMF package in place, Seoul was forced on Friday to announce it would seek IMF assistance.

The IMF has already led two bailout operations to Indonesia and Thailand, totalling almost 60 billion U.S. dollars. But analysts note that bailing out the Korean economy, which is larger than that of Malaysia, Thailand and Indonesia, is a major signal to Asian countries that they cannot isolate themselves from Western- dominated institutions like the IMF.

The Korean decision means the IMF has emerged the victor, according to analysts here, although whether this is ultimately good for Asia will only be apparent if confidence returns to the region’s markets.

Meanwhile, an Asian regional surveillance grouping will be set up in response to criticism by Asian countries that the IMF, sitting in Washington had, in the case of Thailand and even Indonesia, been slow to react to brewing crises there.

Financial analysts say that it is important for Asian countries to send a strong signal to investors that they can act quickly to shore up their currencies in the event of any attack, and that they are willing to stick up for one another rather than go running to western-based financial institutions.

“China’s decision to provide significant funds to shore up Thailand’s economy and Singapore’s decision to provide funds for Indonesia’s were of major importance in this respect,” said a Hong Kong Monetary Authority official.

The Manila-based AsDB has emerged as a favourite for the surveillance base, as Asian finance ministers try to claw back some control over their own affairs. Philippine Finance Secretary Roberto de Ocampo pointed out that all countries involved in talks on the Asian fund facility were also AsDB members, including the U.S. and Japan.

However, the new Asian office of the IMF in Tokyo is making a bid for the regional monitoring role. If it succeeds, the idea of Asia managing its own financial affairs would dim even further.