Money as political currencyCurrency swap is simply politics. The agreement is made between central banks, but the decision is made by financial ministers, or higher. It is based on extensive political and diplomatic calculations. Of course, the country that has the upper hand is the United States as the U.S. dollar is the world currency.
The United States has currency swap agreements with only Japan, the U.K., the EU, Canada and Switzerland. It is not willing to expand, because too many currency swap agreements would mean no one would fear a shortage of U.S. dollars. There would be no reason for China, Japan and Korea to buy and hold U.S. Treasury bonds worth hundreds of billions to trillions of dollars. Having too many currency swaps could affect the American economy, which has the biggest fiscal deficit in the world.
Japan is an imitator and uses currency swaps politically. Last week, Japanese Prime Minister Shinzo Abe suspended the currency swap negotiation because of a “comfort woman” statue in Busan. When a problem arises in politics and foreign policy, he attacks the economy. He is aiming at Korea’s weakest link, the foreign currency trauma. Mr. S, a former high-level official and one of the few international finance experts, said that he wasn’t surprised. “Japan had never helped Korea when we really needed and wanted. Instead, they would take out money first and stab us in our back.”
That’s what Japan did 20 years ago. When the foreign currency crisis hit Korea in 1997, Japan was the first to collect dollars from Korea. It took out $15 billion, more than half of Korea’s foreign currency reserve at the time, which was at most $25 billion.
Financial minister Im Chang-ryeol visited Japan’s Ministry of Finance in person, but he was turned away. Financial Minister Mitsuzuka Hiroshi did not offer any help, claiming that the United States advised against it. Im argued that the Korean economy would not be so troubled if Japan hadn’t taken out the money, but it did not help. Lately, the Korean economy is once again struggling. If the US-China discord intensifies, the foreign currency trauma may return. It is better to have a Korea-Japan currency swap than not. But Seoul cannot back down. Is there any way?
Mr. S says, “We should learn from the past. We will lose for sure if we beg. Korea should make Japan reach out first. Seoul should move the United States and use China as a leverage.”
Let’s look at the past. In 2001 the first Korea-Japan currency swap was made. Japan proposed it first as it wished to set up an Asian Monetary Fund and become a regional hegemon. They needed Korea’s backing to check on Chinese yuan. That’s why Korea signed a 2 billion-won ($1.69 million) currency swap deal when we didn’t really need it. How about in 2008? Japan was reluctant at first, but its attitude changed when a $30-billion Korea-US currency swap negotiation was concluded. The Korea-Japan currency swap quickly increased to $70 billion.
To Japan, Korea’s position is not a major factor. It cares more about pleasing the United States and checking China. It would be a challenge to use China because of the discord over Thaad. We actually have to worry about the Korea-China currency swap that will expire in October. We are left with the United States. So Seoul has to use all available means to bring Trump around, using three things: firstly, the North Korean nuclear program and Thaad; secondly, Wall Street connection sand thirdly, the national pension.
As of the end of 2016, the United States had 189 trillion won invested in the Korean stock market, overwhelmingly the biggest. If the Korean market is shaken by North Korean nuclear threat and Thaad, the United States would also suffer a significant impact. It is a rhetoric that can be used to persuade the United States under Trump. Also, the Wall Street connection should be used. In 2008, the financial team led by Kang Man-soo successfully convinced former treasury secretary and Citi Group adviser Robert Rubin. Rubin had been a direct boss of then treasury secretary Timothy Geithner. It would be more effective in Trump’s financial team, which likes to utilize unofficial connections and has many Wall Street veterans. The 500 trillion-won national pension could also be an attractive lure to Trump, who is eager to invest and create jobs.
If a $30 billion to $50 billion currency swap can be maintained through the Trump administration, Korea’s foreign currency and financial market will be stable. When internal and external storms gather, Korea can focus on reviving the economy without worrying about funds outflow. An additional perk would be blowing Japan out of the water, as it tries to stab us in the back.
JoongAng Ilbo, Jan. 12, Page 30