Enhanced Chiang Mai initiative is credit positive: Moody's

 Doubling the regional financial safety net to US$240 billion is credit positive for CMIM member states, particularly Asia’s weaker sovereign credits such as Vietnam (B1 negative), Cambodia (B2 stable), Laos (unrated) and Myanmar (unrated), said their analysts. The agreement was reached on May 3 by Asean + 3 to double their regional emergency reserve pool, known as the Chiang Mai Initiative Multilateralisation (CMIM), to better prepare for a balance of payments crisis or a loss of market access. The agreement also represents a strengthening and diversifying of the region’s crisis management capabilities, and a shift away from a total dependence on traditional multilateral crisis support mechanisms managed by the International Monetary Fund (IMF).
 Under the CMIM, each participating country is eligible to swap its local currency for US dollars in an amount equal to a multiple of their contribution to the common pool of funds. China, Japan and South Korea provide 80 per cent of the funding. The enhanced framework also increases to 30 per cent of quota from 20 per cent the amount a participant can access without requiring a parallel IMF program, and leaves room to raise the amount to 40 per cent starting in 2014. In addition, the CMIM has longer maturity periods. For example, drawings de-linked from an IMF program have lengths of six months, rather than 90 days, with three renewals totalling up to two years.
 
 
In Moody's Weekly Credit Outlook" released today, the rating agency noted "Our calculations suggest that the frontier economies in the region, those that are unrated or rated B1 or lower would benefit significantly. Not only are the total amounts available to these countries considerably larger than the most recent IMF programs, so too are the portions de-linked from an IMF program. Nonetheless, we note that regional countries, especially those with higher ratings, have self-insured themselves to a greater degree by building up official foreign exchange reserves.
 "That being said, the CMIM would be one weapon in the arsenal of crisis-mitigation devices. Larger regional economies with banking systems more interlinked to the global financial system would likely require more firepower than what the CMIM provides in the event of another global financial crisis. By far, the most powerful weapon remains swap facilities extended by the US Federal Reserve Bank, as it has the ability to create unlimited dollar liquidity. Such swap facilities played a decisive role in stabilizing markets in Asia during the financial panic in late 2008, but were only available to advanced economies or those countries considered by the Fed to be well managed.
 "At a time when the IMF is under pressure to provide a greater contribution to resolving the European sovereign debt crisis, the increasing focus towards self-reliance in Asia will enhance global financial stability."