Asia needs home-grown defence fund
Another crisis could sweep without warning through Asian financial markets, and the best defence would be a 'do-it-yourself' lender-of-last-resort fund, according to former Japanese vice-minister of finance for international affairs Eisuke Sakakibara.
Since global financial markets had barely changed in the wake of the 1997 financial crisis, the risk of disruptive capital flows remained high, Mr Sakakibara warned delegates to a banking conference in Hong Kong.
Because realism, not altruism, dictated policy decisions in the United States and Europe, Asian countries would have to rely on mobilising their savings to defend their markets if that happened again, he said.
Mr Sakakibara, widely known as 'Mr Yen' for his often controversial management of the Japanese currency, was delivering the keynote address at a banking conference organised by Salomon Smith Barney.
'In a domestic context, a central bank is the lender of last resort, but in the current international context neither the International Monetary Fund nor the IMF and the World Bank combined are lenders of last resort,' he said.
Supporting those who argued for a limited role by the IMF as such a lender, Mr Sakakibara said that, if central banks were required in imperfect domestic markets and if potentially disruption-free capital flows were to be maintained, an international lender of last resort was necessary.
'If all the G7 countries and the IMF agreed to lend in sufficient volume to prevent a financial panic, they could perform such a function; and, if we were willing, we could, without forming a world government or a world central bank, form a mechanism around the G7 or the IMF that could play the role.' In the circumstances, he said, the proper questions were: 'Why couldn't we, or why didn't we, or why were we not willing to form this mechanism during the East Asian crisis period between 1997 and 1999?' The answer, said Mr Sakakibara, was that financial panic for one country or region was not necessarily a crisis for other countries.
'And so long as a crisis remains country-specific or regional there will be no urgent political need for unaffected countries to bear the costs of intervening as a lender of last resort,' he said.
The do-it-yourself fund had been raised by Mervyn King, deputy governor of Britain's central bank, and the Japanese Government had proposed the creation of an Asian Monetary Fund (AMF) in 1997, Mr Sakakibara said.
'The idea is . . . to pool parts of the foreign reserves of countries in the region.
'If Japan, China, Hong Kong, Korea, and other Southeast Asian countries provide, say, half of their reserves to the fund . . . it should serve as an effective lender of last resort for the next liquidity crisis,' he said.
The notion of an Asian fund was opposed at the time by the US and Europe because it would undermine the discipline imposed by the IMF on nations to which it provided finance and in this sense be a 'moral hazard'.
'However, if the role of the AMF or regional fund is narrowly defined as the provision of necessary liquidity at a time of crisis with a specific formula for private-sector participation, it could complement the function of the IMF,' said Mr Sakakibara.
BANKING
