By Kim Jae-kyoung
Staff Reporter

South Korea has freed itself, at least for now, from fears of another financial crisis that has haunted Asia's fourth largest economy, with the country signing a $30 billion currency swap agreement with the United States Thursday.

The agreement is a dramatic move that many believe will serve as a stepping stone toward the won's convertibility and boost the international status of the local currency. It is also expected to help stabilize the local financial markets.

The Bank of Korea (BOK) announced Thursday that it inked a temporary reciprocal currency swap contract with the U.S. Federal Reserve in a bid to ease a dollar-funding shortage amid the deepening credit crunch. The agreement expires on April 30, 2009. The United States also signed a similar contract with Brazil, Mexico and Singapore.

With the new currency pipeline with the U.S., the central bank will have access to U.S. dollar funds of up to $30 billion in exchange for Korean won, which will be supplied to local banks through competitive auction facilities.

``The swap agreement will help Korea restore credibility in the global community and provide a strong foothold for the Korean won to emerge as an international currency,'' BOK Deputy Governor Rhee Gwang-ju told reporters.

``The contract reflects that the U.S. recognized our economy as healthy and sound. Therefore, it will help stabilize the local financial market,'' he added.

In a statement, the Fed said that the swap contract was designed to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally ``sound'' and ``well-managed'' economies.

The United States has so far signed currency swap agreements with countries with higher international credit standings ― the EU, Japan, the UK, Switzerland, Norway, Sweden, Denmark, Canada, Australia and New Zealand.

The agreement came concurrently with the International Monetary Fund (IMF)'s announcement of the establishment of a Short-Term Liquidity Facility, which is designed to help member countries deal with liquidity problems on global capital markets.

Since disbursement of IMF resources can be up to 500 percent of quota, with a three-month maturity, Korea can draw a maximum of $22 billion. The country's IMF quota was raised to 1.4 percent, or about $4.4 billion, earlier this year. As a result, the nation has secured a pipeline for additional $52 billion in addition to foreign reserves of $239 billion.

However, Strategy and Finance Minister Kang Man-soo ruled out possibility of using the IMF's facility, citing the Korean people's bitter memory of the IMF's bailout during the 1997-1998 financial crisis.

Market experts said that the agreement will certainly help ease market jitters in the short term but it is still not clear whether it is sufficient to stabilize the local financial markets in the long term.

``This is a good step, but in my opinion it is not large enough. If we have foreign reserves over $200 billion, it should mean that we have swap assets sufficient to provide over $200 billion of U.S. currency in liquid form,'' Market Force Company CEO James Rooney said.

``I would have preferred to see this swap arrangement structured for $100 to $150 billion to allow a larger use of our reserves as real liquidity for the market,'' he added. ``The local currency can emerge as a convertible currency only if the government truly completes the internationalization of the won.''

Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business, echoed the view, saying, ``Whether the contract will improve the won's convertibility is not at all clear. This agreement will be temporary, as I understand it.''

Despite ample foreign reserves, the nation has suffered from rumors that Korea has come closer to another financial crisis, with its currency tumbling headlong.

The local currency has lost around 35 percent in value against the dollar this year as foreign investors scrambled for an exit amid concerns that local banks may face difficulty in repaying short-term foreign debts.

What Is Currency Swap?

A foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped.

kjk@koreatimes.co.kr