Going beyond the swap
The author is the editor of economic news at the JoongAng Ilbo.
The joint announcement on Thursday from central banks of Korea and the United States of a $60 billion currency swap agreement took many by surprise. During a questioning session Tuesday in the National Assembly, Deputy Prime Minister for the Economy Hong Nam-ki indicated some efforts on our part, but did not sound assuring.
A former economic minister who is knowledgeable about the deal-making process admitted the need for a currency swap deal with the United States. But he was skeptical if a renewal could be made under the liberal Moon Jae-in administration, which lacks crucial diplomatic or financial channels to Washington and New York.
In 2008 when Korea signed its first currency swap deal with the United States amid the global financial meltdown, the Lee Myung-bak administration had connections with influential bankers like Citigroup Senior Vice Chairman William Rose, Citigroup advisor Robert Rubin, and Federal Reserve Bank of New York President Timothy Geithner. Rubin was the U.S. Treasury Secretary and Geithner his undersecretary at the time when Korea was in need of an international bailout from the foreign exchange crisis in late 1997. Rose was active in arranging the rollover of Korea’s debt obligations to foreign financial institutions in 1998. Finance Minister Kang Man-soo, who sought a currency swap with the United States in 2008, was a vice finance minister during the foreign exchange crisis in 1997 and 1998.
This time, second-term Bank of Korea Gov. Lee Ju-yeol used his connections with Fed officials. Lee is known to be on first-name terms with Fed Chair Jerome Powell.
Deputy Prime Minister for the Economy Hong also sent a hand-written letter to U.S. Secretary of Treasury Steven Mnuchin.
A currency swap in 2020 will be as helpful as in 2008. The Korean government and central bank should be complimented for their timely effort. But it would be embarrassing if they gloat over that too much.
Last week, the United States struck a currency swap deal with all nine countries that signed on with the United States previously. The United States also needed to bolster the financial security of the dollar. If emerging economies run into a liquidity crunch, financial risk can build up in American financial institutions and elsewhere.
The United States central bank took the action to smooth dollar operations globally. The decision did not come out of its duty to the global order or altruism. It was merely a preemptive — and speedy — move to prevent growing risks of emerging economies from spreading to the United States.
The Fed chair does not act out of his personal connections with his counterparts in nine central banks. The treasury secretary also would not be a sentimentalist moved by a hand-written letter from the Korean finance minister.
Korea’s Finance Ministry and central bank this time did not try to take the credit for the currency swap as it did during the crisis of 2008. The behind-the-scenes episode has not been overhyped either. The Bank of Korea thanked the swift action from the United States. Both Seoul and Washington have acted timely and decisively this time.
The Korean markets which rebounded briefly on Friday from the news lost ground Monday. In the face of the tumultuous markets and economic developments, how well are we prepared this time? Former Korea Finance Center President Kim Ik-joo, who had served as the head of international finance department at the Finance Ministry, used to say, “What if the government cannot stop a third financial crisis even after overcoming two over the last two decades?” His warning is resounding amid the ominous signs in the financial markets at home and abroad.