By Kim Tae-jong
The government hinted Sunday that it will step in to control any sudden, massive outflow of dollars in the wake of the "Bernanke shock."
To that end, it will keep a close watch on foreign currency liquidity at financial companies, while reducing the issuance of long-term state bonds in July to minimize market volatility.
The measures came at a meeting of vice chiefs of four financial authorities _ the Ministry of Strategy and Finance, Financial Services Commission (FSC), Financial Supervisory Service (FSS) and Bank of Korea _ at the Bankers' Club in downtown Seoul, Sunday.
"We will check the exchange market on a daily basis and conduct a stress test on banks to help them better cope with liquidity problems," said Strategy and Finance Vice Minister Choo Kyung-ho after chairing the meeting.
"Once the exchange rate becomes volatile due to speculative trading or herd behavior, we will take swift market stabilization measures," he added.
Contingency plans under consideration are tightening the rules on holdings of forward exchange positions at banks, taxation on foreign bond investments and imposing the so-called macro-prudential stability levy to curb the inflow of short-term capital.
The FSS plans to call for local banks to avoid raising short-term funds abroad and extending fresh foreign currency loans except when there is real demand.
At the same time, the authorities are set to strengthen policy coordination with the Group of 20 countries.
"The government will seek to enhance cooperation with other countries' financial agencies at the G20 Finance Ministers' and Central Bank Governors' Deputies Meeting in July to tackle international financial volatility," Choo said.
The latest move is a follow-up measure after Deputy Prime Minister Hyun Oh-seok vowed to take immediate countermeasures against any market volatility, Friday. Hyun, who also serves as minister of strategy and finance, said, "We will take steps immediately if panicked trading doesn't stop," he said.
The domestic financial market has severely tumbled after U.S. Federal Reserve Chairman Ben Bernanke indicated Wednesday the possible winding down of a stimulus policy.
The benchmark KOSPI retreated 65.48 points, or 3.47 percent, to close at 1822.83 for two days on Thursday and Friday. The foreign exchange market recorded the year's highest won-dollar rate of 1,157.7, up 2 percent from Wednesday.
However, the authorities expect that market turbulence will persist only for a while because they believe that the markets and investors are overreacting to the Bernanke shock, given the nation's sound economic fundamentals.
"The country's financial health, current account surplus, foreign reserves and foreign debt structure are stronger than those in other emerging countries. So there is a slimmer chance of massive capital outflow. From a long-term perspective, we can expect growing exports to the U.S. with the U.S. economy recovering fast, which can be an opportunity," Choo said.
The value of won against the dollar decreased by 2.07 percent for the last two trading days, but it is relatively smaller than other emerging countries' currencies such as Brazil with 3.54 percent, Russia with 3.18 percent, Mexico with 2.94 percent and Australia with 2.77 percent.
The nation's stock market is also relatively less affected by the Bernanke's shock. Benchmarks of Indonesia, Russia, Mexico and Philippines dropped by 6.75 percent, 5.38 percent, 4.92 percent and 4.80 percent, respectively, while the KOSPI dropped by 3.47 percent over the same period.