Gov`t Hints at Intervention in FX Market

The government said yesterday that it could intervene in the foreign exchange market to stabilize foreign exchange rates even if the amount of foreign currency reserves falls under 200 billion U.S. dollars.

Amid the growing possibility of default in Eastern European countries, financial authorities in Seoul also decided to review the foreign loans of domestic banks.

A high-ranking official at Bank of Korea said, “Foreign reserves can always change. We don’t consider if the amount of foreign reserves will fall below 200 billion U.S. dollars in our decision to intervene in the market.”

“It could be problematic if foreign reserves decline by tens of billions of dollars in a short period of time, but a change to 195 billion to 205 billion dollars is not significant.”

An official at the Strategy and Finance Ministry also said, “There is no specific policy direction as for whether the government will further increase foreign reserves or whether it will proactively utilize them, but I don’t think 200 billion dollars is the psychological minimum at this point.”

The comments hint at government intervention in the foreign market in the wake of the won’s value falling to 1,500 won last week.

Most pundits had believed it would be difficult for the government to intervene in the forex market even if it allowed foreign reserves to fall below 200 billion dollars.

Vice Strategy and Finance Minister Kim Dong-soo had said in early December, “Korea can keep its foreign reserves above 200 billion dollars.”

Financial authorities also plan to examine the foreign borrowing of Korean banks amid heightened uncertainty over the international financial market.

A government official said, “If an Eastern European country defaults, it will affect Western European banks that lent huge sums of money to Eastern Europe, and this in turn could affect Korean banks.”

A fourth of Korean banks’ outstanding foreign loans worth 85 billion dollars were borrowed from Western European banks.

legman@donga.com cha@donga.com