By Lee Hyo-sik
Staff Reporter

South Korea's $30 billion currency swap deal with the United States will likely boost the won's value and serve as a stepping stone toward the won's full convertibility, analysts here said Wednesday.

They say the swap arrangement will help ease a dollar shortage here and stabilize the local foreign exchange market, as well as boost international confidence in the world's 13th largest economy and its currency.

But the government cautions that now is not the right time to promote the won's convertibility, stressing it could further destabilize the domestic currency market in the wake of the ongoing global financial market turmoil.

Yoon Deok-ryong, a senior research fellow at Korea Institute for International Economic Policy, said the Korean government worked hard for months to reach the agreement with the United States, adding it will promote the international use of the won in the long run.

``The currency swap deal will greatly help stabilize the won's value against the dollar and other major currencies. I think that to some extent, the U.S. decided to allow Korea to borrow dollars from its central bank in a bid to further cement an alliance between the two nations,'' he said.

The U.S. previously had a currency swap arrangement with only 10 advanced economies. But the Federal Reserve announced Wednesday that it will sign the deal with four more countries ― South Korea, Mexico, Brazil and Singapore.

Yoon said a more stable won will lay the cornerstone for the won's convertibility, adding the wider use of the local currency abroad will increase its value and improve Korea's international profile.

Anthony Michell, a professor at the KDI School of Public Policy and Management, also said the won-dollar swaps announced are a step toward convertibility on a government to government basis, adding this could, if extended to other swap arrangements with the euro and other major currencies, form a stepping stone toward the won's full convertibility.

``The full convertibility of the won would mean that the government has less control over the exchange rate and the market has more control. Consequently the BOK interest rate would become more important internationally,'' Michell said, adding the local financial industry would have to become much more sophisticated as currency dealers would need to look at cross rates more closely, and offer hedging for a much wider range of currencies.

``In a time of complete market failure, like these days, a move for full convertibility might seem reckless because the nation opens itself to speculation by foreigners using hot money. But it is unlikely that the exchange rate would have deteriorated as far as it has,'' he stressed.

Government officials, however, are cautioning that convertibility is a long process, stressing now is not the time to liberalize rules and take other steps to promote the won's use overseas.

``The swap deal reflects Korea's improving international profile and will help move the won's convertibility forward to some extent because of its stabilizing effects. But it will take a long time to realize full convertibility because it is only possible after obtaining full trust in our economy from the international community,'' said Lee Jae-young, the director of the foreign exchange policy division at the Ministry of Strategy and Finance.

Lee said full convertibility is one of government's long-term policy priorities, which will help Koreans who travel overseas and businesses that engage in international trade.

``But now is not the right time to advance the won's convertibility because if foreigners were allowed to borrow won at the moment, they would likely sell it to bet against the currency's depreciation, further destabilizing the local foreign exchange market,'' he said.

Lee also stressed a wide range of international institutional frameworks, including an $80-billion bailout fund to be launched by 12 Asian countries, should first be in place to help the nation cope with any possible crisis.

leehs@koreatimes.co.kr