Foreign capital tax urged to curb risk

Korea needs to fortify its protection against volatility in flows of foreign capital as Europe’s deepening sovereign-debt crisis roils financial markets, a government policy adviser said.

“Various measures can be contemplated, including some tax for the duration of how long the money has been inside the country,” Choi Byung-il, president of the Korea Economic Research Institute, said in an English-language interview in Seoul this week. “Too much destabilization is not good for the economy.”

The won approached a five-month low on Wednesday on concern that Greece will leave the euro, disrupting financial markets and dragging down regional and global economies.

European Union leaders grappling with the region’s debt crisis have discussed steps including jointly issuing euro bonds, with German Chancellor Angela Merkel reaffirming her opposition to such a move after a summit in Brussels on Wednesday.

Authorities need to reduce the won’s volatility by using their “hefty” $317 billion foreign-exchange reserves, Choi said. The won slid 0.8 percent to 1,172.73 per dollar yesterday in Seoul, according to data compiled by Bloomberg. The currency touched 1,175.30 on Friday, the lowest since Dec. 20.

“If the market is showing too much hysteria, the government needs to use its discretion because it has solutions,” Choi said.

Korea had already moved to strengthen firewalls following the crisis sparked by Lehman Brothers collapse in 2008. The country took measures including initiating caps on banks’ holdings of foreign-exchange derivatives in 2010. Last year, it revived taxes on foreign investors’ bond holdings and imposed a levy on banks’ non-deposit foreign-currency liabilities.

Korea is “well prepared” to resist or face any unexpected shock stemming from global uncertainty, Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said last month.

“Because of the unfolding crisis in the euro zone and its repercussions through China, the Korean economy is going through some difficulty,” Choi said, citing the nation’s heavy dependence on international trade. He projected 3.2 percent economic growth for the nation this year.

The OECD said this week that Europe’s debt crisis risks seriously damaging the world economy. It cut its growth forecast for Korea this year to 3.3 percent.

Bloomberg