The Asian Perspective
Edited by Masahiro Kawai, Peter J. Morgan and Pradumna B. Rana
Chapter 5: Financial safety nets in Asia: genesis, evolution, adequacy and way forward
Hal Hill and Jayant Menon
The impetus for strengthening regional financial safety nets among Association of Southeast Asian Nations (ASEAN) countries came following the Asian Financial Crisis (AFC) of 1997–98, when the existing insurance mechanism in the form of the ASEAN Swap Arrangement (ASA) proved miserably inadequate. Forced to turn to the International Monetary Fund (IMF) for the massive bailouts required, and the resentment that ensued following the bitter medicine prescribed, a decision was taken to pursue a regional safety net that could provide a real alternative. The initial step was taken with the creation of the Chiang Mai Initiative (CMI) in 2000, which expanded the bilateral swaps of the ASA both in size and membership to include the People’s Republic of China (PRC), Japan and the Republic of Korea. The CMI’s first test came in September 2008 when, following the Lehman Brothers’ collapse, short-term capital quickly exited emerging economies. However, members of the CMI that required liquidity support did not turn to it but instead rushed to secure bilateral swaps with the United States (US), the PRC, Japan, Australia and the multilaterals. Once again, the regional financial safety net had failed its members. This brought about another significant change when in 2009, the CMI was multilateralized to become the Chiang Mai Initiative Multilateralization (CMIM), with the many swap lines now governed by a single agreement.
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