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The finance ministers from Asean plus China, Japan and South Korea have agreed to expand the bilateral currency swap arrangement from US$86 billion (Bt3 trillion) to US$120 billion. This agreement will be finalised at the next meeting in May. It is an important step for Asean Plus Three to reinforce closer fiscal cooperation at a time when the financial crisis is ravaging the world. In a time of crisis, more reserves are better than less.

By expanding the currency swap arrangement to $120 billion, the Chiang Mai Initiative is going through a vital evolution. The nature of the cooperation will become multilateral. Now the currency swap arrangement is bilateral, through which a member country may establish credit lines with other members in a web of financial networking. When a member country faces a balance of payments crisis, it can draw down the dollar reserves from the credit lines it has established with other members.

But the multilateral framework will move the Chiang Mai Initiative to another level. If all the reserves contributed by Asean Plus Three are put together in one basket totalling $120 billion, it will immediately become a regional fund. This regional fund will act as a lender of last resort for any member countries facing a balance of payments crisis or capital outflow.

Most of the international reserves are now being accumulated in Asia, with China having $2 trillion, Japan almost $1 trillion and Thailand more than $130 billion. So Asia is in a relatively strong position to deal with the financial crisis.

Asian countries have relatively little pressure to contribute their share to the regional fund under the Chiang Mai Initiative since the big Three will shoulder the lion's share. The Asean countries will only contribute 20 per cent of the $120 billion fund, while China, Japan and South Korea will contribute the remaining 80 per cent.

The Philippines originally suggested the size of the fund be raised to $120 billion. Singapore is reluctant with expanding the Chiang Mai Initiative as it would like the International Monetary Fund to be responsible for handling the crisis. Indonesia has been under financial pressure, with the value of its currency plunging the furthest. Japan would like to go along with this regional fund, while China remains sceptical as to how to handle the multilateral cooperation. Thailand is happy to go along with the majority view. South Korea supports this regional fund because its currency has been under pressure.

So the views within Asean Plus Three remain diverse, although at this stage they have agreed to expand the size of the fund and to lay down a foundation for it to truly become a multilateral effort.

The question is how to manage this fund. Now, the world does not have a lender of last resort. When a country faces a crisis, the IMF will arrive on the scene. It will set up tough conditions for the crisis-hit country to follow in return for a credit line in order to resolve the balance of payments crisis. Since the IMF has limited financial resources, it seeks money from countries to contribute to the bail-out package. In this way, the IMF works more like a broker.

As a compromise, Asean Plus Three still prefers to go step by step through this IMF model. They are afraid of the moral hazard. If a member country faces a balance of payments crisis, there must be a formula put in place with tough conditions for drawing down the credit line from the regional fund. Without any conditions, a crisis-hit country might not undertake any drastic reform to correct its macroeconomic imbalances.

So it is necessary for Asean Plus Three to work on a surveillance system, which might lead to institutionalisation of the regional fund later on. Some member countries aren't sure yet as how to manage the regional fund properly. But others say that if they start to manage the fund, they will gain experience and move along.

To play it safe, the IMF will still have to play a central role in handling the financial crisis of a member country. When a member country faces a crisis, it can draw down the reserves from the regional fund. But 80 per cent of this drawing down will be tied to the IMF conditions for reform. The remaining 20 per cent of the drawing down of the credit line will be free from any conditions in order to give the crisis-hit member some room to breathe.

All in all, it is a gigantic step for Asean Plus Three to move toward this route of further financial cooperation. There is also growing evidence that trade within Asia has increased over the past. Asia remains a bastion of growth while other parts of the world are facing severe recession. The next step is to fine-tune the financial arrangement so that the regional fund is managed in a professional way that serves the interests of all member countries.