Currency Safe Valve Secured
South Korea concluded a standing currency swap contract in which the limit and maturity were not set in advance with Canada, one of the world’s six key currency countries. The deal is a standing agreement via which Korea can borrow Canadian dollars without limit with the Korean won, if a liquidity crisis occurs in Korea due to financial market instability. Experts say that the agreement enabled Korea to prepare for volatility in the financial market sparked off by the US Fed’s monetary tightening policies such as additional interest hikes and the reduction of assets.
Lee Ju-yeol, governor of the Bank of Korea, and Stephen Poloz, governor of the Bank of Canada, signed the bilateral currency swap agreement on November 15 (local time) at the headquarters of the Bank of Canada in Ottawa of Canada. The bilateral currency swap went into force immediately after they signed the contract. After signing the currency swap agreement, "This agreement is the most meaningful contract since the signing of a Korea-US currency swap in 2008," governor Lee said. “As Korea firmly established financial stability as the purpose of the currency swap, the currency swap will support Korea if financial instability hits Korea. As there is no time limit, there will be no trouble in the extension of the contract.”
The agreement is quite meaningful in that the contract has the same effects as indefinite and unlimited currency swaps among Canada, the United States, the Euro Zone, Japan, the United Kingdom, and Switzerland. This marks the first time that Korea concluded a currency swap agreement in the form of a standing contract with no maturity and limit. These six key currency countries turned their currency swap agreements into indefinite and unlimited standing contracts in 2013 to step up financial cooperation since the global financial crisis in 2008. "Korea has become able to indirectly enjoy the effects of this currency swap network because Canada has an unlimited currency swap that does not set a limit with the other five key currency countries," said Kim Min-ho, deputy commissioner of international affairs at the Bank of Korea.
This agreement has many important meanings. Canada is one of the six key currency countries with the United States, the Euro Zone, Japan, the United Kingdom and Switzerland. Korea currently has currency swaps with several countries including China and Australia, but there is no contract with a key currency country. For this reason, it has been pointed out that even if borrowing money from other countries which are not key currency countries in the wake of a foreign exchange crisis, it will be able to partially protect Korea as it is difficult to directly use the money in the international money market. This agreement has empowered Korea to secure a key currency that Korea can directly use in times of a crisis. Canadian dollars are the fifth widely used currency in the global financial market after US dollars, the euro, the pound, and the Japanese yen.
As Korea became the second country in the world to have a standing currency swap agreement with Canada after China except for the key currency countries, it is expected that this deal will have a positive impact on improving Korea’s external creditability, too. Trade and financial exchanges between Korea and China are also expected to be promoted. This is because a currency swap itself epitomizes economic cooperation. As of last year, bilateral trade ran to US$ 8.83 billion. Earlier Korea and Canada signed a free trade agreement (FTA) in January 2015.
"Since Canadian dollars can be regarded as international currencies, Korea’s currency swap deal with Canada dwarfs Korea’s currency swap deals with newly emerging economies in terms of promoting Korea’s financial stability." said Lee Chang-sun, a senior research fellow at the LG Economic Research Institute. “In particular, it is expected that the currency swap will be able to ease pressure on the rise of exchange rates if foreign funds leave Korea in the future as the swap set no maturity date and volume.”