Gov`t to suggest currency swap network at G-20 summit

Following Korea’s signing of a currency swap deal with the U.S. in 2008, Korean exporters, unmoved by government pressure to sell U.S. dollars, poured greenbacks on the foreign exchange market.

As a result, the won-dollar exchange rate plunged 177 points, the biggest drop since Dec. 26, 1997, during the Asian currency crisis.

Seoul hopes to form a currency swap network with major central banks at the G-20 summit next month, a move apparently intended to curb the weakening won. After posting 1,060 in early August, the won-dollar rate exceeded 1,100 following the Chuseok (Korean Thanksgiving) holiday and is now near 1,200 won.

Foreign exchange reserves reached 312.2 billion dollars in August, up 100 billion dollars from three years ago, but this has done little to resolve financial jitters. The trade surplus, considered the last remedy against a financial crisis, has declined sharply.

In September, the presidential office reopened an emergency economic meeting in one year, which it had held it bimonthly. The currency swap deal with the U.S. expired in February this year, and similar deals with China and Japan have been reduced sharply in scale.

Amid increasing volatility in the foreign currency market, private think tanks say the government must again sign a currency swap deal with the U.S. The government, however, says it has no intention of doing so for the moment for fear that the market could interpret the news as a sign of a problem in Korea’s foreign liquidity situation.

The government is trying to turn the currency swap network into a global economic system to overcome such limits of coordination among countries. A temporary deal with the U.S. cannot effectively prevent a foreign liquidity crisis that occurs repeatedly.

The government wants to make a currency swap deal network into something like the Chiang Mai Initiative, a multilateral currency swap arrangement worth 120 billion dollars among 14 Asian countries including the ASEAN Plus Three countries — the 10 Southeast Asian nations plus China, Japan and South Korea. The initiative allows each member country to swap their currencies with U.S. dollars in times of crisis.

An official at the Korean Strategy and Finance Ministry said, “The global currency swap network will center on G-20 countries and will joined by several countries such as Singapore, allowing each member to swap their currencies but not dollars.”

Many hurdles remain before the signing, however. The U.K., France, Japan and the International Monetary Fund have pledged active coordination, but the U.S. and Germany are skeptical due to the high cost burden.

Unlike the global financial crisis three years ago, the latest crisis erupted due to fiscal problems in the U.S. and Europe, making support from emerging market economies inevitable. Hopes are thus high that advanced economies will shift their stances.

A merit of the proposed currency swap network among major economies is that it can help ease the global trade imbalance. Kim Jeong-shik, an economics professor at Yonsei University in Seoul, said, “The global currency swap network can solve the problem of emerging economies and developing countries piling up excess foreign exchange reserves against foreign capital outflow in crises. The setup of a global financial safety net through currency swaps can relieve emerging economies’ burden of raising foreign exchange reserves and relying on a current account surplus."

The Korean government said it will propose expanding the International Monetary Fund’s role at the G-20 summit. A Strategy and Finance Ministry official said, “We are in talks on extending loans from the International Monetary Fund from one to two years to three or six months. We are also close to an agreement on the idea that the fund should judge on its own criteria countries that are showing signs of crisis but unable to request bailouts and support them.”

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