The currency swap myth

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The currency swap myth

The author is the deputy editor of the economic policy news team of the JoongAng Ilbo.

In October 2008, the conflict between the Ministry of Economy and Finance and the Bank of Korea (BOK) reached a climax. It was shortly after the first Korea-U.S. currency swap was celebrated. Complaints first broke out in the central bank after the ministry leaked the signing a day before the official announcement and gave a misleading interview to take all the credit.

The ministry did not stay quiet. It claimed that the BOK had changed its position once the swap was signed even though it was passive in negotiation from the beginning. Criticism on both heads and talks of dismissing the person in charge followed. The conflict was so serious that then-President Lee Myung-bak openly warned that there should be no boundaries between government ministries when it comes to overcoming a crisis, and all should become one.

The impact of the Korea-U.S. currency swap was so great at the time that the two agencies fought over taking the credit. The value of the won — which fell to nearly 1,500 won per dollar in the aftermath of the global financial crisis originating from the U.S. — bounced back by 200 won in just two days. The struggling Kospi also surged. The impact of the deal to exchange both currencies and withdraw $30 billion at any time was powerful. The unfamiliar currency swap became engraved in Koreans’ minds at that time.

Last week, U.S. Secretary of Treasury Janet Yellen visited Korea. Due to the uncertainty in the currency market, there were strong demands to pursue the Korea-U.S. currency swap again. Yellen left Korea without making any direct mentioning of a currency swap, as expected.

Full authority over currency swaps belongs to the Federal Reserve. It is not something the Department of Treasury can decide. That is very different from Korea, where the Ministry of Economy and Finance oversees the foreign exchange system. A ministry official summed up the awkward situation: if Secretary Yellen were to announce a Korea-U.S. currency swap, it would be like Finance Minister Chu Kyung-ho — not the BOK governor — increasing the base rate next month.

It is comical to ask Yellen to sign a currency swap deal when she is not in charge. If the swap deal is signed, it would be good for the market, but it’s not a panacea. In 2008, it had a short-lived effect, but the country could not get out of the financial storm. I hope that inappropriate talks of a currency swap will not be discussed whenever a Korea-U.S. meeting is held.
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