Asian nations will set up a $120 billion foreign-currency reserve pool by year-end

TO BE NOTED: From Bloomberg:

"Asia’s $120 Billion Reserve Fund to Boost Investor Confidence

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By Shamim Adam and Jason Clenfield

May 4 (Bloomberg) -- Asian nations will set up a $120 billion foreign-currency reserve pool by year-end to help revive investor confidence as economies around the region falter amid the worst global recession since World War II.

The Association of Southeast Asian Nations, together with Japan, China and South Korea, will use the funds in times of turmoil. They will set up a surveillance unit that will identify risks to the region and provide oversight of the fund. Japan also offered $60 billion of yen-denominated swap facilities.

“It’s not so much the amounts of money being put in, but the concept of these countries getting together and cooperating,” Mark Mobius, who helps oversee $20 billion in emerging-market assets at Templeton Asset Management Ltd., said in an interview yesterday in Bali, Indonesia. “That’s a very positive development.”

The fund, known as the Chiang Mai Initiative, widens access to foreign-exchange reserves allowing nations such as Indonesia and Thailand, recipients of International Monetary Fund bailouts a decade ago, to defend their currencies. The 13 nations have accumulated more than $3.6 trillion of currency reserves since, with China owning more than half of the assets.

“The idea is for the Asean plus three countries to effectively look after ourselves with our own reserves,” Thai Finance Minister Korn Chatikavanij said yesterday in Bali, where the officials met.

$100 Billion Loans

The IMF arranged more than $100 billion of loans to Thailand, Indonesia and South Korea after their currencies collapsed during the 1997-1998 crisis. In return, governments were forced to cut spending, raise interest rates and sell state-owned companies.

In Thailand, former Prime Minister Thaksin Shinawatra asked his countrymen to fly the national flag on offices, homes and factories after making the last payment in 2003 of the $12.3 billion it drew. Indonesia repaid its debt in 2006, four years before schedule.

Following yesterday’s agreement, Japan will contribute $38.4 billion to the fund, while China and Hong Kong together will add another $38.4 billion to the pool. South Korea’s contribution will be $19.2 billion.

The Southeast Asian nations will contribute 20 percent of the total amount. Thailand, Indonesia, Malaysia and Singapore, the four biggest Southeast Asian economies, will contribute $4.77 billion each, and the Philippines will provide $3.68 billion.

Surveillance System

Under the Chiang Mai Initiative, Asian nations can borrow, without restrictions, 20 percent of an agreed swap amount. They can tap the 80 percent balance only after agreeing to IMF-style restrictions.

That may change as the surveillance system is developed, Korn said. The IMF, Asian Development Bank and the Asean Secretariat will be tapped initially for their expertise in such matters, finance ministers said.

“We feel that we ought to also develop a surveillance system and manage it ourselves as opposed to needing to rely on the surveillance system of institutions outside the region,” Korn said. “The idea is that as we increase our surveillance capacity, the de-linked portion increases.”

Nine of the region’s 10 currencies tracked by Bloomberg fell against the U.S. dollar in the first three months of the year. This quarter, eight have gained against their U.S. counterpart.

‘Real Traction’

“One of the beneficiaries of this crisis, if you want to call it that, has been the way it speeded up the regional market development,” said Gerard Lyons, London-based chief economist at Standard Chartered Bank, said in an interview in Bali. “The Chiang Mai Initiative has now started to get real traction.”

Countries such as Japan and China are doing more to help others navigate through the crisis. China last month announced plans to create a $10 billion investment cooperation fund and offer $15 billion in credit to its Southeast Asian neighbors.

Japan’s Finance Minister Kaoru Yosano yesterday said the country will offer $60 billion of yen-denominated swap facilities to help nations during a financial crisis. Asia’s biggest economy will also guarantee up to 500 billion yen ($5 billion) of yen-denominated bonds, or Samurai bonds, issued in Japanese markets by developing countries, he said.

“The entire world was hit by the crisis and it can only be addressed through international cooperation,” Yosano said. Cooperation is “the resource we achieved in the meeting.”

This week, economic reports around the world tell the story of an ongoing economic contraction

TO BE NOTED: From News N Economics:

"Economic reports around the world (April 1-7): still scary

Wednesday, April 8, 2009

This week, economic reports around the world tell the story of an ongoing economic contraction. Overall this week's reports suggest that there is still a lot for global policymakers to worry about.

EXPORT GROWTH IS STILL IN THE RED ZONE

The chart below illustrates monthly exports through March for South Korea and Taiwan, and through February for Malaysia and Indonesia (export numbers are not seasonally factored and listed in $US). Over the year the annual growth rates show ongoing weakness.

INFLATION FALLS - STILL MOSTLY ON ENERGY AND COMMODITIES....

The chart below illustrates annual inflation rates through March for Thailand, South Korea, Switzerland, and Taiwan. Serious weakness in global demand has dragged down energy and commodity prices, taking inflation to deflation in some cases. However, eventually this will pass through to core prices (prices ex energy and food) at a lag, and core inflation (which is still very positive in the US) will fall, too. Switzerland is now negative, -0.4%, and Taiwan and Thailand have experienced deflation for two and three consecutive months, respectively.


UNEMPLOYMENT IS WEAK IN THE EUROZONE AND THE US

The chart below illustrates the annual change in the unemployment rate for the Eurozone through February and the US through March. Both registered 8.5% unemployment rates in each respective month, or a serious deterioration in labor market conditions over the year.

The labor market is generally lagged to overall economic conditions - it takes a while for firms to internalize the economic situation, firing late and hiring late. So these economies may be recovering well-before the unemployment rate starts to decline (jobless recovery).

BUT IT DOES LOOK LIKE THE ECB IS WAY LATE

The chart below illustrates the policy rates for the European Central Bank (ECB) and the Bank of Japan (BoJ). The ECB cut by 25 bps to 1.25%, and the Bank of Japan left its rate unchanged at 0.1%. Given the previous chart, which illustrates the sharp decline in labor market conditions across the Eurozone, it seems that the ECB started to ease too late. Perhaps it is because wages are a little stickier in Europe.


ANOTHER OMINOUS SIGN OF WEAKNESS IN CONSUMER SPENDING

The chart below illustrates annual retail sales growth through February for Germany and Hong Kong. Hong Kong sales are clearly tumbling, falling 13.9% over the year. German retail sales growth, however, are quite volatile; it's 5.3% decline does not show any weakness beyond normal activity since early 2007. Interesting.

THE LANDSLIDE IN UK INDUSTRIAL PRODUCTION CONTINUES

The chart below illustrates UK industrial production in levels and its growth over the year. Nosedive. According to jka online blog, the sector breakdown was:

Consumer non durables, (-5%), textiles (-5.4%) and food and drink (-4%) were relatively lightly hit. Fuel products, the only sector showing growth up by just 1%.

Auf Wiedersehen, Rebecca Wilder"

"Central banks that needed cash to cover large capital outflows from their own economies"

Brad Setser:

"A few quick words on the November TIC data

Posted on Friday, January 16th, 2009

By bsetser

China sold $9.2 billion of long-term Treasuries. But it also bought $38.2b of short-term Treasuries.( THE FLIGHT TO SAFETY CONTINUED ) China’s total Treasury holdings are up by $29.1b. By contrast it sold $3.1b of long-term Agencies( IMPLICITLY GUARANTEED ) and also reduced its short-term holdings by about $5 billion. China reallocated( TO EXPLICIT GUARANTEES ) its US portfolio, but it hasn’t cut back on its dollar purchases.( IT WANTS TO PRESERVE ITS CURRENT RELATIONSHIP WITH THE US AT ALL COSTS. )

The following graph, prepared with help from Arpana Pandey, plots the average increase in China’s reserves (defined broadly, to include hidden reserves) over the last 3 months v my best estimate (taking flows through London into account*) of China’s Treasury and Agency purchases. It speaks for itself.( THE FLIGHT TO SAFETY. PERIOD. FROM IMPLICIT TO EXPLICIT GUARANTEES. IN A CALLING RUN, THIS IS WHERE YOU WANT TO BE. )

The same story applies to the official sector as a whole. Central banks sold $26.2b of long-term Treasuries, but added $66.6b to their short-term Treasury holdings. Net central bank holdings of Treasuries — judging from the TIC data — rose by $40.4b. That is consistent with the $49.1b rise in the Fed’s custodial holdings of Treasuries. Central banks by contrast are reducing their holdings of short-term and long-term Agencies. They sold $14.3b of long-term Agencies, and their short-term holdings likely fell by a comparable amount.**

The countries that are really running down their Treasury portfolio — Korea and Brazil — are countries whose reserves are falling and need the cash( A CALLING RUN ). Russia is running down its Agency portfolio for a similar reason. It really needs the cash( A CALLING ). Its short-term Agency holdings are down to $13.7b. They were close to $100b — 496.8b — in December of 2007.

The big stories in the TIC data, it seems to me, are:

– The ongoing reallocation of central bank portfolios toward short-term Treasuries. That reallocation has been huge( THE FLIGHT TO SAFETY ). Central banks held $$276.8b of t-bills at the end of September. They hold $427.2b at the end of December. And judging from the Fed’s custodial data there is every reason to think that total rose in December. Foreign central bank demand for safe and liquid assets rose at the same time as private demand rose.( FOR THE SAME REASON. THE FLIGHT TO SAFETY. )

– The ongoing retreat of private capital from global markets, or what I previously called the reversal of financial globalization( SIMPLY A CALLING RUN OR DEBT-DEFLATIONARY SPIRAL. ). Foreign investors sold $56b of US long-term securities in November, and another $36.6b in October. Central banks that needed cash to cover large capital outflows from their own economies( A CALLING RUN ) or that simply wanted to shift to short-term t-bills accounted for the majority of those sales, but private investors were selling too. Americans have sold about $35 billion of foreign securities in each of the last three months as well.( A CALLING RUN )

As a result, the US trade deficit is now effectively financed by short-term inflows — including short-term inflows from central banks*** - and the fact that American investors are currently selling their foreign portfolio faster than (private) foreign investors are selling their existing US portfolio.( FOR THE SAME REASONS. A CALLING RUN. IN NOVEMBER, A PROACTIVITY RUN BEGAN. )

* London flows had no real impact on the recent data.
** The US reports data on short-term negotiable securities held by central banks and short-term Agencies held by all foreigners, but not short-term Agencies held by central banks. i have to extrapolate a bit.
*** Some of these short-term inflows may be a reallocation away from private custodians, and thus may not represent a true increase in demand for US assets.

This entry was posted on Friday, January 16th, 2009 at 11:21 am and is filed under U.S. trade deficit and external debt, central bank reserves. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site."

This is not hard to understand. In the comments, all sorts of technical reasons are put forth, but they are only symptoms, and of little or no explanatory power. Please read I. Fisher. What I call a Calling Run is a version of his Debt-Deflationary Spiral.

"``The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.''

We've discussed Swap lines to various smaller countries from the Fed in discussing:

Soros:
2) Swap lines from big countries to small countries ( Fine )

Sachs:
1) Big national banks extend swap lines to smaller country national banks. ( Fine ) See Brad Setser here.

From Bloomberg:

"Fed Opens Swaps With South Korea, Brazil, Mexico, Singapore

By Steve Matthews and William Sim

Oct. 30 (Bloomberg) -- The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.

The Fed set up ``liquidity swap facilities with the central banks of these four large systemically important economies'' effective until April 30, the central bank said yesterday in a statement. The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding.''

Fed Chairman Ben S. Bernanke is trying to prevent the global credit crisis from upending the financial markets and economies of developing countries, where currencies have plunged and government bond premiums have soared. The Fed yesterday cut its benchmark interest rate, followed by Hong Kong and Taiwan today."

Read the whole post.

I agree with this:

``We can't leave these other important countries out in the cold,'' said Edwin Truman, a senior fellow at the Peterson Institute for International Economics in Washington and former chief of the Fed's international-finance division. ``A global recession is being caused by the effects of seizing up of the financial system around the world.''

Countries listed:
South Korea
Brazil
Mexico
Singapore
New Zealand
Australia
Central European Bank

and a few others.

Also, Brad Setser:

"Today the Federal Reserve indicated that it would swap US dollars for Brazilian real, Korean won, Mexican pesos and Singapore dollars — effectively allowing a select group of emerging economies to borrow dollars on terms similar to those available to the G-10 economies. Or almost similar terms. The G-10 central banks can currently borrow dollars from the Fed without limit; the four selected emerging market central banks can only borrow $30 billion each. But $120 billion is real money — and if need be, the the size of these swap lines conceivably could be increased.

This move goes some way toward breaking down the line between the G-7 (really G-10) economies and emerging economies that emerged after the G-7 countries guaranteed that systemically important financial institutions in their economies wouldn’t be allowed to fail and the Fed expanded the scale of the swap lines available to European economies whose banks had a large need for dollars. "