LONDON, June 29 (Reuters) - Emerging economies should have enough hard cash reserves to survive the worst of the credit crisis but reserve pooling may ultimately reduce the need for foreign currency stockpiling, the BIS said on Monday.
In its annual report, the Bank for International Settlements -- a forum for the world's central banks -- said stabilising foreign exchange rates and maintaining the flow of foreign financing via hard cash liquidity provisions has been critical for emerging economies trying to weather the crisis.
Policymakers and investors have worried about the depletion of national foreign currency reserves. The BIS said: "Markets remain comparatively unsettled, and there has been no full recovery."
However, developments in crisis management over the past year could eventually make large foreign reserve stockpiles unnecessary, and this could ease the global imbalances that reserve-hoarding in Asia and elsewhere has helped fuel.
In the first quarter of 2008, it said foreign currency reserves fell to 80 percent of June 2008 levels in Korea and India and 75 percent and 65 percent respectively in Poland and Russia.
Using rules of thumb -- such as the need for reserves to cover all external debt coming due in one year or to cover 3 to 6 months of national imports -- existing buffers remained strong. On the first measure, the cover in Asia and Russia was 400 percent and it was some 300 percent in Latin America.
"These figures suggest that many EMEs (emerging market economy) central banks could meet the foreign currency financing requirements of the private sector for well over a year," it said.
"However, a severe economic downturn and a delayed recovery in capital flows could produce further episodes of market instability that could lead to a much faster draining of reserves than suggested by these indicators."
SWAPPING OUT
World foreign currency reserves ballooned to $7 trillion in the 10 years following the 1997/98 Asia financial crisis -- with almost two-thirds held by developing nations.
But the BIS noted alternatives, including the $30 billion reciprocal currency swap with the U.S. Federal Reserve that South Korea, Mexico, Brazil and Singapore entered in October 2008.
Last month, 13 East and Southeast Asia countries set up a $120 billion emergency fund drawing on international reserves and extending existing regional currency swap lines established under the so-called Chiang Mai Agreement.
And the G20 group of leading economies in April committed to a tripling of International Monetary Fund capital to $750 billion. Major emerging economies such as Mexico, Poland and Colombia have since signed up to the IMF's Flexible Credit Line for crisis-hit, but well-managed economies.
"Over the medium term, these new initiatives could also help EMEs reduce their reliance on reserve accumulation, which in turn could contribute to reduced global imbalances," the BIS said.
(Reporting by Mike Dolan, Editing by Ruth Pitchford)