A Defense against Financial Crisis
Attention is focusing on whether a Korea-U.S. monetary swap agreement will be signed in 10 years.
“Currently, I think there is no problem with Korea’s external soundness, but the more safety nets we have, the better,” said an official from the Ministry of Strategy and Finance on March 12. "It is good news that the U.S. will expand its currency swap partners. But the U.S. government has not clarified its position yet. It may appear strange for Korea to make a suggestion first.”
The Korean financial market has taken a blow from the COVID-19 outbreak, but the country does not face a serious liquidity crisis.
Earlier, the Wall Street Journal (WSJ) suggested that the United States needs to sign currency swaps with major countries including Korea as part of efforts to stabilize the international financial market, which was shocked by the new coronavirus spread.
In principle, the U.S. Federal Reserve Board concludes currency swap deals only with countries of key currencies unless a crisis hits the United States. Accordingly, it currently has currency swap agreements with only five partners — the European Union, the United Kingdom, Japan, Canada and Switzerland.
The U.S. Federal Reserve Board signed a currency swap agreement with 14 countries, including Korea, during the global financial crisis in 2008 and most of them came to an end in 2010. In 2008, Korea signed a US$30 billion currency swap with the U.S. just before its foreign exchange reserves fell below US$200 billion This deal served as the most powerful defense against the global financial crisis.
Currently, Korea has more than US$133.2 billion in currency swaps with countries such as China and Australia. As of the end of February, Korea’s foreign exchange reserves amounted to US$490 million, the world's 9th-largest. The country is not in a very urgent situation.
Nevertheless, as a currency swap with the United States enhances credibility in the international financial market, it is necessary for the Korean government to make a decision to pursue it.