Strategy and Finance Minister Yoon Jeung-hyun

Finance minister defends floating FX system despite growing concern on volatility

By Cho Jin-seo
Staff reporter

Minister of Strategy and Finance Yoon Jeung-hyun has made it clear that Korea will continue to float its currency on the open market even though there is growing skepticism on the safety of the country's currency exchange system in the increasingly volatile international financial market.

Instead, Yoon, in an e-mail interview with The Korea Times this week, said the government will adopt other measures, such as a special bank levy, to control the rapid cross-border flow of money in and out of Korea, which has been wildly shaking the won-dollar exchange rate.

"Abolishing the free-floating foreign exchange system is not an option for the government," Yoon said. The currency floating system, he said, was efficient in absorbing external shocks and controlling risk on the market. Also, considering the size of the economy and the country's international reputation, he said it was inevitable for the government to stick to the current system.

"We maintain our policy initiative that the foreign exchange rate should move in line with economic fundamentals and market supply and demand. But we will try our best to prevent the foreign exchange rate from rapidly fluctuating due to herd behavior in the market."

Korea is one of a few countries that pursues a "small and open" economy by allowing its currency, the won, to be freely traded on the open market with limited government intervention.

The government has a limited control on the exchange rate, since it too has to buy or sell currencies on the free market. On the contrary, many other small, industrialized nations such as Singapore and Taiwan use various types of government management tools, such as a currency band or currency basket. In extreme cases such as China, governments peg the rate of their currency against the dollar and other big currencies.

South Korea floated the won after the 1998 Asian financial crisis, but the 2008 crisis has shown that the market-based flexible exchange system cannot fully protect the national economy from the speculative movement of global capital. Yoon said that the bank levy scheme, which is being discussed in G-20 meetings, will provide good protection.

"I believe the adoption of the bank levy will discourage banks from moving around too much capital, thus improve the healthiness of the foreign exchange market," he said. "It will also contribute to the general improvement of the current financial system, under which bankers reap the profit in a bull market and taxpayers bear the cost of a crisis."

Speaking for non-G20s

Yoon, 63, has been leading the Ministry of Strategy and Finance since February 2009, and is being credited with leading South Korea to weather the aftermath of the 2008 crisis in a relatively healthy manner. He is a career public servant, joining the ministry almost four decades ago.

With South Korea assuming the role of chair-nation for a G-20 meeting this year, Yoon has played the role of moderator in meetings of finance ministers and central bank governors.

In general, rich, advanced countries such as the United States and the United Kingdom are calling for the adoption of a bank levy and other bank reform plans for other countries. On the contrary, Korea and other smaller nations are more interested in how to prevent the spill-over of a crisis across borders.

Ahead of the Busan meeting this week, Yoon said South Korea will represent this view of developing nations by urging the G-20 nations to establish a comprehensive and effective safety net for the global economy.

"To improve the legitimacy and the effectiveness of the meeting, the G-20 should reflect the interest of non-G-20 nations as well," he said, adding that the Korean government is especially well engaged in outreach programs in Southeast Asia and Africa.

Going beyond the IMF

One of the most crucial issues for developing nations in Asia, Africa and Latin America is to have a solid safety net for a possible financial crisis, but Yoon says that he cannot fully trust existing global rescuers such as the International Monetary Fund (IMF) on this matter.

One reason that the IMF is not very effective is that once a country applies for an IMF loan, then its credit rating may suffer a downgrade, which will result in a further crisis on financial markets.

"There are a number of financial safety nets, but each of them has limitations. For example, the emergency funding program of the IMF has enough resources but it has a stigma effect on the receiving country," he said. On the other hand, "regional safety nets such as the Chiang Mai Initiative have a low stigma effect but they have limited resources," he added.

One solution Yoon is proposing at the G-20 for this dilemma is to link various safety nets and use them flexibly to minimize the "stigma effect" while making the most of the resources available ― a safety net that is supported by multiple pillars.

"What we are going to build is a network of these individual safety nets, so they can complement each other and create synergy. South Korea is leading the discussions on the global safety net as the Korea initiative," Yoon said.

As for the movement in some countries to regulate the size and the operation of big banks, Yoon said Korean banks should not be measured in the same way Western banks are criticized.

"Each nation is different in the situation its banking industry faces. The size, the level of development, and regulatory and supervisory systems are all different. And there are various opinions at the international level, so we may need further discussions on this issue," he said.

"As for Korea, we need to hit a balance in between making a more competitive finance industry and preventing a systemic risk in it."