A looming foreign exchange crisis

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A looming foreign exchange crisis

CHO HYUN-SOOK
The author is the deputy editor of the economic policy team of the JoongAng Ilbo.

The definition of a foreign exchange crisis is simple. It refers to a crisis caused by a shortage of foreign currency, or U.S. dollars, to be used to exchange for the Korean won. In 1997, Korea experienced such a crisis. Running out of foreign currency reserve, the country was on the verge of a national bankruptcy. In November that year, Korea requested a $20 billion bailout to the International Monastery Fund (IMF).

The cost was high. The IMF demanded stringent austerity measures. As money was running short, the housing mortgage rate soared to the 20 percent range with interest rates for small and mid-sized business loans surging to the 30 percent level. The Korean economy, once called the Miracle of the Han River, sank rapidly. Countless companies collapsed, and household bankruptcies continued.

The foreign exchange crisis and the IMF bailout left a significant scar on Koreans. When the economy becomes unstable, the fear of a foreign currency crisis is recalled. That’s what happened during the 2008 global financial crisis that started in the United States. As foreign funds flew out quickly, the value of the won plunged.

The fear of an imminent second IMF bailout spread in the market after the rumors of “crisis in March” and “crisis in September” spread fast. In October, then President Lee Myung-bak gave a speech on the radio that while things were challenging, the situation was quite different from during of the foreign exchange crisis.

The fear of a foreign exchange crisis has come back. Prices, interest rates and exchange rates are not looking good. The rate of consumer price increase hovers around 5 to 6 percent compared to the previous year. The rate is the highest in 24 years since the 7.5 percent in 1998 and higher than the 4.4 percent in 1997 at the height of the foreign exchange crisis.

The won-dollar exchange rate broke the 1,300-won ceiling and is moving to the 1,400-won range. It only happened during the financial crisis.

The government response is also similar. Appearing in the National Assembly on Aug. 29, Finance Minister Choo Kyung-ho said Korea’s foreign currency reserve was sufficient and that it was different form the 1997 foreign reserve crisis.

A foreign exchange crisis or a financial crisis are only a type of an economic crisis. A crisis always changes and evolves. Paul Krugman, the winner of Nobel Prize in Economics, wrote in his book “The Return of Depression Economics and the Crisis of 2008,” “The financial crisis keeps developing new dimensions, which few people — including the very smart people at the Fed — see coming.”

A new crisis is approaching. I only hope that it won’t be the worst economic crisis beyond the level of the foreign exchange crisis 25 years ago.
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