The case for currency swaps

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The case for currency swaps

Korea’s currency swap agreement with China expires today. The two countries have been maintaining the $56 billion swap for the past seven years ever since the 2008 financial meltdown.

But the prospect of extending it again after two previous renewals is unclear given the rancor on both sides over South Korea’s decision to deploy the controversial Terminal High Altitude Area Defense system to cope with growing nuclear threats from North Korea.

On Monday, the Ministry of Strategy and Finance and Bank of Korea said the government could not confirm whether Seoul and Beijing would extend the deal for a third time. What does this last-minute uncertainty mean? It could testify to Beijing’s reluctance on the agreement despite Seoul’s request for another extension.

On China’s part, it has nothing to lose. As a nation with the world’s largest foreign exchange reserves, China would not feel a strong need to continue its currency swap with Korea. Nevertheless, our government must not stop calling for an extension in the face of an ever tougher global financial environment.

If Korea fails to extend the maturity date, the situation could unexpectedly turn serious even with the country’s $384.8 billion in foreign exchange reserves as of August. If the government fails to extend it, Korea has no other currency swap left with major economies in the world, including the United States, Japan and China. Having experienced a financial crisis twice, Korea knows the significance of currency swaps better than anyone.

The government must not make light of the numerous foreign investors offloading 3 trillion won ($2.6 billion) worth of our government bonds shortly before the Chuseok holiday earlier this month. Investors’ jitters about our financial market can trigger an overreaction from foreign exchange markets. S&P also bases its sovereign credit rating on a country’s ability to pay with foreign exchange reserves.

And the government must not rely on China only. It must be able to use the umbrella of U.S. dollars as it did after striking a $30 billion currency swap deal with the United States in 2008. An agreement with the United States will also help ease concerns about Korea’s financial stability. When it comes to the foreign exchange shield, the more the better.

JoongAng Ilbo, Oct. 10, Page 30
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