The biggest riskTwo decades have passed since the country went through its biggest postwar crisis upon being hit by the Asian 1997-98 foreign exchange crisis. We painstakingly learned how vulnerable and pitiful we could be as our currency did not have the international reserve status of the U.S. dollar. No foreign lenders offered to roll over the maturing debt of Korean institutions.
As a result, we had to run to Washington and Tokyo for help. The U.S. administration, under President Bill Clinton, coolly advised the Kim Young-sam administration in Seoul to seek aid from the International Monetary Fund.
As it turned out, Japanese institutions were the first to take their money out of the Korean market. Then-deputy prime minister for the economy and finance minister, Lim Chang-ryeol, flew to Tokyo only to be turned away.
Seoul eventually sought an IMF-led bailout, but still could not stop the foreign capital flight. By the time Kim Dae-jung was elected president to succeed Kim Young-sam, the country was on the brink of declaring bankruptcy as the foreign exchange reserve balance was estimated to reach from negative $600 million to $900 million by the end of 1997.
The president-elect had to report to the then-undersecretary of the U.S. Treasury and vow to comply with the ruthless IMF reforms, which included massive layoffs and mergers and acquisitions.
Upon assurance from the dissident-turned-president, the United States, IMF and 12 other states agreed to dole out $10 billion in emergency funds. The pledge arrived on Christmas Eve. Silent supporters were then-U.S. Defense Secretary William Cohen and Secretary of State Madeleine Albright. They persuaded the Treasury Department to move the IMF by highlighting the importance of financial stability in Korea, which is home to thousands of American soldiers.
A decade later in 2008, a crisis triggered by Wall Street reached Korean shores. Market conditions were as perilous as in 1997-98. As the rollover stopped in September, the Korean won shot up to 1,500 won against the U.S. dollar. Korea then had foreign exchange reserves of over $200 billion. But that could not be a sufficient buffer when international markets rocked. Foreign investors frantically pulled their money out of emerging markets.
Korea was able to avoid a major crisis because it was under a currency swap pact with the United States that secured up to $30 billion should the country run into a liquidity crisis. The backup balance was a huge reassurance and stopped the foreign capital run. The experiences over the last two decades underscore the importance of attaining support from economies with reserve currencies.
Are we secure against another possible crisis? Korea’s foreign exchange reserves reached $384.8 billion as of August. Despite the relative wealth in the coffers, the ammunition may not be enough to fight another international crisis.
Foreign funds tend to take money out of emerging markets if they do not have confidence in authorities and their capacity to control the situation at an early stage. It is therefore important to give assurances that the country is safe from a liquidity crisis.
The $10 billion from 13 governments worked as the guarantee in 1997 and a currency swap with the United States did so in 2008.
Korea’s defense on the currency front is not entirely safe. The swap agreement with the United States has not been renewed since its term ended in 2010. The one with Japan expired two and a half years ago. Seoul also cannot expect to see renewal in the $56 billion swap agreement with Beijing that expires on Oct. 10, given the soured relationship between the two countries.
As in 1997, we lack support from the United States and Japan.
We may be on our own should another crisis arrive. We must be prepared. We must not let our guard down by thinking we have stocked up enough currency reserves.
Complacency can be the biggest risk on the economic and security front.
JoongAng Ilbo, Oct. 2, Page 24
*The author is the editor of world news at the JoongAng Ilbo.