The Currency Swap Myth
CHO HYUN SOOK
The author is deputy editor of JoongAng Ilbo’s economic policy news team.
In October 2008, the conflict between the Ministry of Economy and Finance and the Bank of Korea (BOK) reached its climax. This was shortly after the celebration of the first currency exchange between Korea and the United States. Complaints first erupted at the central bank after the ministry leaked the signing a day before the official announcement and gave a misleading interview to take full credit.
The ministry did not remain silent. He claimed that the BOK changed its position once the swap was signed, even though it had been passive in the negotiations from the start. Double-headed criticism and talk of firing the responsible person ensued. The conflict was so severe that then-President Lee Myung-bak openly warned that there should be no boundaries between government departments when it comes to overcoming a crisis, and that all should become one.
The impact of the currency exchange between Korea and the United States was so great at the time that the two agencies argued over who took the credit. The value of the won – which fell to nearly 1,500 won to the dollar in the aftermath of the global financial crisis originating in the United States – rebounded 200 won in just two days. The struggling Kospi also surged. The impact of the agreement to swap the two currencies and withdraw $30 billion at any time has been powerful. The unfamiliar currency exchange became etched in the minds of Koreans at this time.
Last week, US Treasury Secretary Janet Yellen visited Korea. Due to the uncertainty in the currency market, there have been strong demands to continue the currency exchange between Korea and the United States again. Yellen left Korea without directly mentioning a currency exchange, as expected.
Full authority over currency swaps rests with the Federal Reserve. It’s not something the Treasury Department can decide. This is very different from Korea, where the Ministry of Economy and Finance oversees the foreign exchange system. A ministry official summed up the delicate situation: if Secretary Yellen were to announce a currency swap between Korea and the United States, it would be as if Finance Minister Chu Kyung-ho – and not the BOK governor – raise the base rate next month.
It’s comical to ask Yellen to sign a currency swap deal when she’s not in charge. If the exchange agreement is signed, it would be good for the market, but it is not a panacea. In 2008, it had a short-lived effect, but the country could not get out of the financial turmoil. I hope inappropriate talks on a currency exchange will not be discussed every time a Korea-US meeting takes place.