VZCZCXRO5810
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0947/01 2490202
ZNR UUUUU ZZH
R 050202Z SEP 08
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 5708
INFO RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 5929
RUEHBJ/AMEMBASSY BEIJING 2839
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 SINGAPORE 000947 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EEB/OIA 
STATE PASS TREASURY FOR MNUGENT, MPISA 
BEIJING FOR DLOEVINGER 
TOKYO FOR RKAPROTH 
 
E.O. 12958: N/A 
TAGS: ECIN ECON EFIN PGOV PREL SN
SUBJECT: BACKGROUNDER ON THE CHIANG MAI INITIATIVE 
 
REF: SINGAPORE 143 
 
¶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 
resolved. 
 
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: 
http://www.treas.gov/press/releases/js4323.ht 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. 
 
HERBOLD