[Outlook]Smaller number, bigger impactWhich is the biggest among 240, 80 and 30? That’s a stupid question, so I’ll put it this way. Which is the strongest of the three numbers? In most cases, the biggest is the strongest. It couldn’t be any clearer when comparing simple figures. But the answer to the question is 30.
Why? Do they have different units? No. They all have the same unit - billion dollars. But recently, $30 billion proved to have the strongest impact.
The first figure, $240 billion, is Korea’s current foreign exchange reserves as of late September. To be precise, it is $239.7 billion. The money was accumulated in case of a foreign exchange crisis. Simply put, a foreign exchange crisis means that the foreign currency has run out.
That happened in late 1997. Our economy was strutting into the world’s top 10, but that goal was shattered without mercy. We didn’t realize the power of the United States and the dollar until then. Since the crisis, all have worked hard and tightened their belts. As a result we were able to accumulate huge foreign reserves. The International Monetary Fund has assets worth $200 billion, which illustrates how large our foreign reserves are.
However, once we faced global financial turmoil, the money didn’t mean much. We saved it up in case of rainy days, but when a rainy day came it was hard to use it. The value of the money was too little to meet huge demand for dollars in the markets.
Foreign capital, which had come into Korea for speculative purposes, started to leave the country. Investors were trying to revive their home countries and their companies that were in trouble. We shouted that Korea’s economy had become much healthier but they didn’t listen. They transferred the won that had lost substantial value into the dollar, sending the won plunging even further.
In his speech at the National Assembly on Oct. 27, President Lee Myung-bak announced that there wouldn’t be a foreign exchange crisis but that didn’t help the situation much. There were worries that if the foreign reserve was used to stabilize the won, the same thing that happened 11 years ago would happen again. We had a gorgeous sword but couldn’t take it out and wield it.
So what is the second figure - 80? On Oct. 24, 10 Asian countries, namely Korea, China, Japan and the members of the Association of Southeast Asian Nations, agreed to raise a fund of $80 billion by the first half of next year to help one another in case of a crisis.
North America, Europe and South America have each already formed a single market or are on the way to doing so. In Asia, however, each country has different situation and works to overcome difficulties on its own. Therefore, the agreement was meaningful.
As Wall Street, which used to demonstrate invincible power, fell into a coma, the order in the financial markets was re-established. At this juncture, Asia can emerge in the center.
The talks about the fund started 11 years ago for this purpose. When Asia was going through a foreign exchange crisis, Japan proposed that Asian countries cooperate with one another, starting negotiations. But the United States was worried that its influence on the financial markets in the world would weaken and the IMF opposed the idea, so the negotiation didn’t proceed. Then the New York-sparked financial tsunami swept across the world, imposing tremendous damage and at last the agreement could be reached.
Cooperation among Korea, China and Japan is more meaningful, especially when looking at the dollars that the countries possess. China has nearly $2 trillion and Japan nearly $1 trillion. But this measure didn’t help the situation much in Seoul’s foreign exchange market.
This leaves 30, the third figure. On Oct. 29, news broke that Korea would sign a currency swap contract with the United States. The next day, this was made public and the financial markets responded with drastic changes.
Stock prices went up by 115 points, or 12 percent, and the won-dollar exchange rate fell by a whopping 177 won (14 cents). A currency swap means that two countries exchange their currencies. In case of a crisis, the U.S. will exchange the dollar with the won. The Korean government issues the won and the United States the dollar. Therefore, the currency swap effectively allows Korea to issue the dollar. The limit of the swap was decided at $30 billion. That is only one-eighth of our foreign reserve but it wielded a stronger impact than any other measures.
Korea’s foreign reserve also consists of the U.S. dollar, the same currency that the currency swap deal offers. But why do the two have different degrees of impact?
It is because different players exert power. If a small child wields a bat larger than himself, nobody is threatened. But if a grown-up person stands up and establishes order, that becomes the law. No economics textbooks state any examples in which a central bank buys bills that private companies issue, but the U.S. made a deal to do so. The world is not a fair place. It never was. An old Korean saying goes that if you feel you are not treated fairly, you should become successful. Then people will respect you.
*The writer is the economic news editor of the JoongAng Ilbo.
by Shim Shang-bok