Korea urged to ink currency swap deals with US, Japan

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By Lee Kyung-min

Korea needs to reestablish currency swap lines with the U.S. and Japan in a preemptive measure to help cushion virus-induced uncertainties in the foreign exchange market, economists said Tuesday.

While the finance ministry is maintaining a “wait-and-see” stance saying there is no urgency, economists believe the government should be fully prepared against a worst-case scenario to prevent rapid deterioration of the financial market.

The fear of foreign capital outflow has been reduced following a 1 percent “big cut” by the U.S. Federal Reserve, but the further spread of the new coronavirus compounded by a slower-than-expected recovery of growth of the Chinese economy could devastate Korea, according to an economist.

“The risk is delayed, not neutralized,” Seoul National University economist Kim So-young said.

“If foreign investors see even an inkling of signs they consider enough to trigger possible full-scale disruption in the economy, there will be no stopping them moving out of the country.”

In 2008, amid the full-blown global financial crisis, Korea managed to avoid market dislocation thanks in large part to a $30 billion (37.2 trillion won) currency swap deal with the U.S.

The deal helped stabilize the local foreign exchange market that saw the Korean won plummeting at nearly 1,500 won against the U.S. dollar, but the deal ended in February 2010.

The $13 billion swap deal with Japan ended in 2015, 14 years after the country first signed a $2 billion deal. From 2008 and 2011, the amount increased to $70 billion.

Currently, Korea has maintained currency swap arrangements with China, Canada, Switzerland and Australia.

The market showing growing signs of “irregularities” is another warning that policymakers should heed, according to former Financial Services Commission Chairman Jun Kwang-woo.

The recent crash of stock markets around the world means risk-averse investors funneling their money into safe-haven, fixed-income assets ― mostly treasury bonds.

Yet, the price of bonds, which moves inversely to yields, has been synchronized with the stock market index as of late.

According to the market index, the foreign net purchase of three-year treasury bonds and the S&P 500 are showing similar movements since March.

“This means the market participants are no longer considering safe assets as a full alternative to risky equity investment. The fears in the overreaction-driven market volatility can spread across the economy fast, at which point it will be too late,” Jun said.

The Ministry of Economy and Finance said there are no immediate plans for swap deals.

“We are closely monitoring the financial market. The need for prompt swaps is not much of a policy priority at this point, but changes can and will be made if financial instability risks are heightened,” a senior ministry official said.

Following a 50 basis point key rate cut at an emergency monetary board meeting Monday, Bank of Korea Governor Lee Ju-yeol said that a currency swap deal with the U.S. could be a good safety net against market unrest associated with foreign exchange risks.