Bilateral Swap Agreement
India and Japan signed a $75 billion bilateral foreign exchange agreement in October 2018. Although the Fed found itself in the country during the financial crisis to „save“ European banks, the PBoC was publicly criticized for signing a swap agreement with Russia just before the fall of the ruble at the end of 2014. PBoC was forced to react on Chinese social networks and stated that swaps were guaranteed on the basis of the exchange rate prevailing at the time of their actual use, and not at the old prices that prevailed at the time the agreements were signed. The previous movements in the ruble were therefore irrelevant – the bank was indeed well protected. But the controversy showed how sensitive the issue of swaps had become at a time of global financial turmoil. Following the 1997/98 Asian financial crisis, the Association of South Asian Nations (ASEAN), China, South Korea and Japan established a network of bilateral currency exchange agreements „to complement existing international institutions.“ In 2010, the Chiang Mai Initiative (CMI) was multilateralized, meaning it was transformed by a network of bilateral agreements between countries into a single agreement, the Chiang Mai Initiative Multilateralization (CMIM). A monitoring unit, the ASEAN-3 Macroeconomic Research Office (AMRO), has been established to monitor member countries for signs of emerging risks and to conduct an analysis of countries requesting funds from CMIM, as the International Monetary Fund (IMF) does for its member countries. The fourteen countries participating in the CMIM accepted some financial contribution and were allowed to borrow several times, from 0.5 for China and Japan to five for Vietnam, Cambodia, Myanmar, Brunei and Laos. In 2014, the volume of the agreement doubled from $120 billion to $240 billion, and the amount a country could access without having to participate in an IMF program increased from 20 to 30 percent. Since the 2007 financial crisis, swaps have been used by central banks to obtain foreign exchange, increase reserves and lend to domestic banks and businesses. While the terms of the swap agreements are intended to protect the two central banks participating in the swap from losses due to currency fluctuations, there is a definite risk that a central bank will reject or fail to comply with the terms of the agreement.