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Korea and the United States have signed a US$30 billion currency swap agreement whereby the Bank of Korea can deposit Korean won in the U.S. Federal Reserve Board, which allows the withdrawal of up to $30 billion at any time. This has the effect of bolstering Korea¡¯s foreign currency reserves by that maximum and has significantly eased the dollar shortage that had been pressuring domestic financial markets.
The KOSPI closed at 1,084.72 points on Thursday, up some 12 percent or 115.75 points from the previous day¡¯s close. The won strengthened by W177 against the dollar to finish at 1,250. Along with forecasts that Korea would post a more than $1 billion current account surplus in October and the IMF¡¯s decision to offer temporary dollar support to emerging markets, that alleviated investor jitters.
But the greatest boost to market sentiment came from the currency swap deal, which demonstrated the U.S. government¡¯s confidence in Korea¡¯s economy and proved there is no risk of the country defaulting. Adding weight to that view is the fact that until now, the U.S. government had made currency swap agreements only with the European Central Bank, as well as the central banks of 10 advanced countries including Japan, the U.K. and Switzerland. Currency swap deals are possible only if there is confidence in the stability of the other country¡¯s economy.
This was the first time the U.S. government expanded currency swap agreements to emerging economies; it chose Korea, Mexico, Brazil and Singapore as partners in policy coordination to deal with the global financial crisis, forming a ¡°currency alliance.¡± Korea¡¯s economic status and external confidence have gotten a boost, while currency speculators will find it harder to attack the won for quick profits.
The currency swap deal does not automatically resolve all of the problems facing the Korean economy: there is still a dollar shortage in international financial markets, and corporate bankruptcies and a slowdown in the real economy are still real concerns. The government should quickly expand currency swap deals with Japan and China so that foreign currency shortage worries can be eased completely. At present, Korea has currency swap agreements worth $13 billion with Japan and $4 billion with China. The government¡¯s aim is to double that.
The government must take the lead in lowering uncertainties surrounding the Korean economy, including a cash shortage among builders. If the won stabilizes, then consumer price volatility will ease as well, giving the government more room to lower rates and boost fiscal spending. The immediate flames have been doused. It is now time to focus on boosting the economy by reinvigorating private spending and creating more jobs.
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