A temporary measureThe government is attempting to resuscitate the financial sector, which is suffering from a foreign currency shortage, by pouring in $10 billion in exchange equalization funds.
This emergency measure aims to deal with the dire lack of dollars at domestic financial companies which are unable to borrow foreign currency as a result of the U.S. financial crisis. However, the exchange equalization fund is only a stopgap measure and not a fundamental solution to the foreign currency shortage.
Lehman Brothers’ insolvency drastically exacerbated the foreign currency situation, but our shortage of foreign capital is not new. After the U.S. subprime crisis began, international credit began to tighten and things worsened starting this year. As international credit tightens, domestic financial companies that have a weak credit rating and poor ability to borrow foreign currency will face a foreign currency crisis.
This does not mean that we can supply dollars to the tiny domestic foreign currency market. After the crisis emerged, foreign investors left the Korean market, exacerbating the dollar shortage. This shows a real vulnerability on the part of the domestic foreign currency market and financial companies to a foreign currency crisis. This led to skyrocketing interest rates in dollar borrowing and the most unfavorable won-dollar exchange rate in four years.
The government is expecting the foreign currency shortage to be resolved once the U.S. government pours in bailout funds, but the tight international credit is not likely to loosen up immediately.
This means that the domestic dollar famine is likely to continue, and that we must find ways to solve the structural dollar shortage.
For now, we could consider measures to more actively use foreign currency holdings. We should not only have swap exchanges, wherein we exchange foreign currencies with the Korean won in the short term, but directly lend foreign currency holdings to domestic financial companies.
As long as domestic financial firms remain strong, there is no reason to only manage foreign currency holdings abroad. If we are concerned with security, then lending foreign currency holdings connected to the firms’ real demands is also possible.
Even if we can only alleviate real demand for the dollar, we can significantly lower the pressure to improve the won’s foreign currency exchange rate in the market.