ed Financial tsunami

Precluding currency crisis is a life-or-death issue

Korea’s small, open economy is vulnerable to external shocks. The otherwise healthy economy is now at the mercy of the simultaneous financial tsunamis shaking the United States and the European Union. The nation badly needs measures against a temporary shortage of foreign currency liquidity.

Morgan Stanley and Nomura have warned that Korea must grind its teeth to protect its stocks, currency and exports from Western financial tornadoes.

Over the past 11 years, Korea was on the brink of national bankruptcy thrice because of a temporary dollar shortage.

Local banks must be under special watch as 60 percent of their external liabilities of $200 billion are short-term debts maturing in less than a year.

American and European investors might liquidate much of their Korean stocks and bonds to meet cash shortages at home. This will cause the won to plummet.

The Korean economy is in a solid state, with the current account in surplus for the past 17 months. Foreign exchange reserves amounted to $311 billion in July. Foreign assets exceed external debts.

Foreign investors seem not to be too optimistic about Korea's liquidity situation, however. Korean credit default swap (CDS), a financial product indicating the nation's dollar liquidity situation, changed hands at an eight-month high. International investors become nervous when they see any sign of weakness in an economy. A return to a trade deficit will trigger jitters about Korea's ability to repay foreign debts. They have lingering doubts over the risk-management capability of local banks, and they also may start speculative attacks in the local stock and currency markets. Adding fuel to the fire may be a massive withdrawal of loans from local banks.

Regulators cannot blame or control the behavior of foreign investors. They must mobilize financial and regulatory firepower.

First, they should be ready to put foreign exchange reserves on standby in case of a massive outflow of foreign funds. In the past, the government was unable to utilize the fund in a timely manner as it parked much of the reserves in illiquid assets.

Kim Suk-dong, chairman of the Financial Supervisory Commission, was timely in his warning to banks for their poor dollar management.

He said banks deceived him three times since 1997 about their liquidity status. Regulators must raise the bar to help banks cope with a possible mismatch of short-term foreign debts against long-term foreign assets. The mismatch is a serious flash point for a banking crisis, which will later turn into a national bankruptcy.

Banks should not repeat the same mistakes. CEOs need to strengthen risk management, and take pre-emptive steps to protect banks from the global financial tsunami. Calming the public frenzy is also essential.

Regulators must be on standby for decisive action in case of an emergency. The market is not always correct. Precluding another currency crisis is equivalent to the military’s water-tight defense of the country.

Forestalling another currency crisis is a matter of life and death.