Time for a swap

The fear of a foreign exchange crisis is deepening after the value of the Korean won declined to 1,285.70 won per U.S. dollar. The exchange rate soared by 40 won Thursday — and more than 130 won over the last month. The steepest fall in the Korean currency since the Wall Street-triggered global meltdown in 2008 fuels concerns about the solidity of our foreign reserves. Despite government reassurances about our strong economic fundamentals in 1997, Korea had to seek a bailout from the IMF in return for harsh restructuring. As a result, large companies and major local banks collapsed one after another, which led to over 2 million jobless.

Such a crisis can return to Korea at any time given the shocking tumble of Kospi to 1,457.64 on Thursday — the same level as in 2009 — in the wake of the coronavirus outbreak. The crisis has hit both the Main Street and Yeouido, or Korea’s Wall Street. Morgan Stanley lowered its estimate for our growth rate for this year to 0.4 percent.

In response, President Moon Jae-in held his first emergency meeting Thursday with government officials to tackle the plethora of challenges by creating an extraordinary public fund to help small- and medium-sized companies and mom-and-pop stores across the nation stay afloat. As Moon said, the government took an “unavoidable step” when even the U.S. government is thinking of doling out $1,000 in cash to each citizen to avert a catastrophic situation.

Korea faces an even more serious situation. As the world economy enters into panic mode and foreign investors rush to sell Korean stocks to find safer assets, jitters about Korea are ever-deepening. Foreign investors sold $5.8 billion in Korean shares in the first two weeks of the month. If they convert the proceeds to dollars, anxieties over the exchange rate will grow out of control.

Korea has $401.9 billion in foreign reserves — nearly double the amount of 12 years ago. But even that may not be enough given the mounting foreign exchange risks. To make matters worse, if our exports have nowhere to go, our dollar revenues will shrink rapidly. Korea’s credit default swap premium — a barometer of a country’s foreign exchange situation — doubled compared to last December.

The government must strike a currency deal with the United States. In 2008, Korea averted a crisis thanks to a $30 billion swap deal with the United States. The United States can cope with an economic crisis by printing greenbacks, but Korea is helpless once its foreign exchange reserves are depleted. As Prof. Chang Ha-joon at the University of Cambridge says, the government cannot overcome the crisis through generous handouts because “Korea is in a quasi-war state now.” The government must not repeat the nightmare of 1997.