Global financial crisis sets Asian governments on to new policy-actions

---

David Piliing in Tokyo, Roel Landingin in Manila, John Aglionby in Jakarta and Joe Leahy in Mumbai, FT Syndication Service
Asian governments are planning to accelerate the implementation of a regional currency swap scheme, increasing its size to $80bn (euro60bn, £46bn), and expanding its scope in response to the global financial crisis.
However, Indonesian, Singaporean and South Korean officials said proposals did not involve the creation of a new fund to buy toxic debt and help regional banks hit by the crisis.
They stressed that they saw no need for funds to be released in the near future since no country was facing conditions on the scale of the Asian financial crisis of 10 years ago.
Mahendra Siregar, Indonesia's deputy economics minister for international economic co-operation, said the 10-member Association of South-East Asian Nations (Asean), China, Japan and South Korea are in discussions with each other and with agencies like the World Bank, International Monetary Fund and Asian Development Bank, to bolster a financing facility under the Chiang Mai Initiative.
The plan for bilateral currency swaps was developed after the 1997 Asian financial crisis when many countries saw their currencies weaken.
Asean finance ministers agreed on October 7 to expand the plan from bilateral swaps to multilateral swaps, bring forward its implementation to the first half of next year, and invite multilateral agencies to participate. "It's about helping governments with short-term liquidity issues," Mr Mahendra said. "It's not like what the Europeans or Americans are doing."
The Singapore government stated it is "not aware of any proposal for the Asean plus three nations to set-up a multi-billion dollar fund to buy toxic debts and help the region's banks".
Economists are uncertain about the facility's efficacy. Fauzi Ichsan, of Standard Chartered Bank, said co- ordinated intervention from central banks might be more effective than Asean, which has little experience of anything of this scope.
Gloria Macapagal Arroyo, Philippine president, has tried to create the impression of a co-ordinated Asian response to the financial crisis, conjuring up a $10bn facility supposedly agreed by the World Bank.
Mrs Macapagal said Wednesday that finance officials from the 10-member Association of South-east Asian Nations (Asean), together with counterparts from China, Japan and Korea, had also "reached an understanding to establish a standby facility to assist Asean countries who have severe liquidity problems".
A World Bank spokesman suggested plans were less advanced than Mrs Macapagal suggested. "The World Bank is supporting Asean members in developing a co-ordinated response, but has thus far not been asked to contribute to a regional facility, nor has it discussed commitment of funds at a regional level," he said.
After the Asian financial crisis of 1997, the idea was floated of an Asian monetary fund to complement - or even subsume the role of - the unpopular IMF, which was insisting on harsh remedies, some of which were subsequently discredited. That idea was strongly opposed by the US.
An effort by the Asian Development Bank to come up with a quasi basket currency - Asia's equivalent of the European Currency Unit, the euro's forerunner - has foundered on indifference and disagreement about the appropriate balance of power in a fast-changing region.
Governments are continuing to take action at a national level with India and Kazakhstan announcing fresh initiatives last Wednesday. India's regulators announced a slew of measures to tackle a liquidity squeeze in the banking system, including the second cut in the cash reserve ratio, one of the central bank's key levers of monetary control, in less than a week.
Palaniappan Chidambaram, the finance minister, asked the Reserve Bank of India (RBI) to release immediately to financial institutions the first Rs250bn instalment of a loan waiver for farmers and doubled the foreign investment limit in corporate bonds to $6.0bn (euro4.42bn, £3.49bn).
The RBI also cut by 100 basis points to 6.5 per cent the amount of cash that banks must keep on deposit with the central bank - the second such monetary easing since Friday, when it slashed the cash reserve ratio by 150 basis points.
"The continuing uncertain global situation is having an indirect impact on our financial markets," the RBI said.
India's government insists the country's banking system remains healthy but says it has been hit by a liquidity crunch stemming partly from a mass exodus from the stock market by foreign investors.
The outflows from the stock market have sent the rupee crashing 18.8 per cent against the dollar this year to Rs48.50, its biggest depreciation since 1991.
Mr Chidambaram also announced last Wednesday a "capitalisation" scheme to bring those banks that had capital adequacy ratios of between 10 per cent and 12 per cent up to 12 per cent. The details of the scheme were still being "worked out".
The liquidity squeeze comes at a time of growing concern over some of India's macro-economic fundamentals, such as the fiscal deficit.
Initiatives such as the farm loan waiver and soaring subsidies for oil and fertilizers as well as government pay rises have led to a sharp decline in the health of government finances.
Goldman Sachs last Wednesday said it expected the overall fiscal deficit to reach 8.4 per cent of gross domestic product this year from 6.2 per cent a year earlier.
Kazakhstan plans to prohibit banks from raising mortgage interest rates for three years to help stabilise the local property market.
The new mortgage rules will cover new and outstanding loans, Mukhtar Bubeyev, the head of bank supervision at Kazakhstan's agency for financial supervision, said.
Kazakhstan announced plans last month to use state and private funds to buy up $6.0bn worth of distressed assets from the highly-leveraged banking sector which is particularly exposed to the property market downturn.
Nursultan Nazarbayev, Kazakhstan president, urged legislators to rush through a new financial stability law to bolster public confidence in the banking sector. Mr Nazarbayev said the government would use $10bn from the national oil fund in the next two years to support banks, small businesses and electricity projects to promote economic growth.
Another FT Syndication Service report by David Oakley in London adds: Investor fears over the risk of many emerging market countries defaulting on their debt have risen sharply as Iceland's financial collapse has hit sentiment, discouraging funds from investing in these economies.
The market is pricing the risk of default for countries such as Pakistan, Argentina, Ukraine and Iceland at 80 per cent or higher as their banking systems come under increasing pressure due to the credit crisis.
Trading in credit default swaps (CDS)- a form of insurance against bonds defaulting - indicates expectations that Pakistan has a 90 per cent chance of defaulting on its debt.
CDS spreads on Pakistan, which is haemorrhaging foreign exchange reserves to prop up a weak rupee, have risen to a record 3,026 basis points, or a cost of more than $3.0m to insure $10m of debt over five years. This is a threefold jump since the collapse of Lehman Brothers on September 15.
Other countries running into difficulties include Kazakhstan and Latvia, which have highly leveraged banking systems that have sparked growing concerns over the health of their economies, and Turkey, which has one of the highest current account deficits in Europe.
Nick Chamie, head of emerging markets research at RBC Capital Markets, said: "Although I would not say any of these countries are likely to default in the coming weeks, there is certainly a higher risk. They are all suffering from the problems in the rich countries. They are the collateral damage of the western credit crisis."
The currencies and stock markets of these countries have come under severe strains in the past one and a half week too, although many revived lately as they drew strength from the bail-out packages agreed by banks and central banks over the last weekend.