Seoul to raise level of financial contingency plan

By Choi Sung-jin

With currency markets here or abroad fluctuating almost daily amid the “G4” risks, financial authorities are revisiting their contingency plan from the ground up.

The current plan, mapped out in June 2013 when global financial markets underwent a “taper tantrum” after the end of U.S. quantitative easing, needs to be enhanced to make preemptive responses, officials say.

“The present situation is alarming as the value of the Korean currency has plunged to its lowest level in nearly six years,” an official said. “In order to ease market unrest and cope swiftly with a possible crisis, we need to reexamine the existing contingency plan.”

The government recently held an interagency meeting and discussed extensively how to improve countermeasures in the five-level contingency plan -- normal, attentive, cautious, alert and grave. The government maintained the highest “grave” level for four months from September 2008.

For starters, the financial authorities are considering expanding the phased application of the existing “three-piece set of macro-prudential countermeasures.” For example, they could advance the timing to apply flexible tax rates on overseas investment in Korean bonds to the “alert” or “cautious” stage from the present “grave” stage.

The authorities are also considering concluding currency swap accords with major countries as early as possible. Korea has swap agreements with China, United Arab Emirates, Malaysia, Australia and Indonesia. Agreements with the United States and Japan expired in April 2009 and February 2015, respectively.

The nation used to seek currency swaps when financial markets entered the “grave” stage, but are considering advancing such efforts to the “alert” or “cautious” stage.

The government also plans to reexamine the appropriate levels of foreign reserves, which market watchers describe as seawall to ensure currency market stability, under various scenarios, while expanding holdings ready for immediate use.

Answering questions at the National Assembly Friday, Minister of Strategy and Finance Yoo Il-ho said the government had foreign reserves enough to cope with the “predictable turmoil” in international financial markets.

In a related development, concerns are growing that Korea could be among the first target group of the U.S. sanctions against possible manipulators of currencies.

Korea’s trade surplus against the U.S. last year accounted for 1.8 percent of its gross domestic product, twice the 0.9 percent in 2010. The nation’s current-account surplus against GDP also jumped from 2.6 percent to 7.4 percent over the same period.

The U.S. Treasury Department recently noted in its biannual report on foreign exchange rates that “Korea intervened in currency markets to block the rise in its currency value.” A financial official in Korea also said that the U.S. seemed to demand more data last year than previously.

Commenting on the U.S. moves toward designating Korea as a currency manipulator, a government official here said there was no need to overreact. “It is mainly political pressure conscious of mounting complaints from U.S. exporters,” he said.

Unlike in the past when Korea tried to keep its currency value low, the financial authorities said they now maintain a “no comment” policy except for some smoothing operations and verbal intervention when urgently needed.

But some private experts have cautioned that Washington’s designation sometimes did not have much to do with actual manipulation of currency values.

“For political reasons, the U.S. administration is unlikely to apply its revised law to China or Israel,” an expert said. “Countries with little political influence, such as Korea and Taiwan, could be high on its candidate list.”

Seoul should do more to clear up misunderstandings through diplomacy based on closer cooperation between industrial and financial authorities at home, he added.