Page last updated at 02:00 GMT, Thursday, 4 December 2008

Is it time for an Asian Monetary Fund?

By Jonathan Head
BBC News, Bangkok

Eleven years ago, the world was gripped by a financial crisis every bit as dramatic as the one we are witnessing today.

Share prices board in Tokyo
Asia's financial might should not be ignored

It too erupted after the collapse of a speculative bubble, much of it in real estate, and driven by the availability of too much cheap money.

But that crisis was confined to East Asia.

It was in the midst of that meltdown, in September 1997, that the International Monetary Fund (IMF) held its annual meeting in Hong Kong.

At the meeting, Eisuke Sakakibara, the powerful Japanese minister, known as 'Mr. Yen' for his ability to move the currency markets, quietly summoned some of his Asian colleagues to float an idea.

What about an Asian version of the IMF - an Asian Monetary Fund?

Mr Sakakibara was an IMF sceptic. He believed - presciently as it happened - that the IMF was too dominated by Anglo-Saxon economic thinking, that it was unsuited to dealing with Asia's problems.

The proposal was quickly shot down by Larry Summers, the then US Deputy Treasury Secretary.

The US argued strongly against an IMF rival - it believed an Asian Fund might be too soft when demanding reform in return for monetary rescue.

Will it happen?

But the idea didn't go away.

Eisuke Sakakibara - Mr Yen
Eisuke Sakakibara was known as "Mr Yen"

Bruised by their dealings with the IMF, Asian governments resolved never again to go cap-in-hand to the Fund.

They set about rebuilding their foreign exchange reserves with such determination that today, with $3.5 trillion, East Asia holds two thirds of all the reserves in the world.

But what if they suffered another run on their currencies?

That's where the so-called Chiang Mai Initiative came in eight years ago.

Unlike Mr. Sakakibara's ambitious idea, this was simply an arrangement among a number of Asian countries to swap relatively small amounts of currency, should one of them run into trouble.

And it was meant to complement, not replace the IMF.

But it was the start of something very important - a recognition that East Asia's economic power now entitled it to start building its own financial architecture.

And now, as western economies experience their greatest crash in generations, the idea of an Asian Monetary Fund is taking flight again.

Finance ministers from the region have already agreed to create a multi-lateral stabilization fund which could grow to $350bn; 10% of regional reserves, and considerably more than the IMF has in its arsenal.

So will it happen?

The answer is, not for some time, and not before an awful lot of detail is hammered out.

They would need to decide what kind of crisis entitled a country to draw on these reserves, how to supervise them, even such basic details as how much each country should contribute - and what they get in return.

These are precisely the issues now haunting the US-dominated IMF.

No joke

And perhaps the biggest obstacle is the difficult relationship between the world's largest hoarders of foreign exchange, China and Japan.

Asia's two giant rivals are often barely on speaking terms. How could they possibly agree to run an alternative IMF?

Right now they probably couldn't.

But don't rule it out.

A few years ago Eisuke Sakakibara liked to joke that the IMF would be better located in Mumbai or Shanghai.

It doesn't sound like such a joke today.

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