Posted by: Ihlwan Moon on October 30, 2008
The Federal Reserve’s agreement on Oct. 29 to open a $30 billion credit line with the Bank of Korea was a shot in the arm for South Korea’s financial system. On Oct. 30, the Korean won jumped 14% against the dollar, the biggest gain in 11 years, while the benchmark Kospi index soared a record 12% on the Seoul bourse. The Fed, which signed a $30 billion currency swap each with the central banks of Korea, Brazil, Mexico and Singapore, was confirming that it would include emerging nations in its efforts to ease a global credit crunch.
The reaction of the financial markets in Korea is a reminder of the importance of the Fed’s leadership. Without supports from U.S. monetary authorities, policymakers of export-driven economies in the emerging world could become helpless in their efforts to stem capital flight as their countries are so vulnerable to outside shocks.
Previous steps by Korea’s government and central bank didn’t do much to alleviate investor fears that the country’s banking system could fail in the face of a global credit meltdown. That’s in spite of Korea’s $240 billion foreign exchange reserves, the sixth largest in the world, which is bigger than the country’s short-term debts totaling $176 billion.
Now, the Seoul government is ready to follow up with a package to thaw money markets and bolster the economy. President Lee Myung Bak pledged that he’s ready to take more steps to aid the economy, while Korean lawmakers on Oct. 30 approved the government’s $100 billion guarantee of foreign currency loans to help local banks roll over their maturing debts. The Bank of Korea this week cut its base rate by 0.75 percentage points.
Default protection costs on Korean government debt fell after the Fed’s currency swap deal. Five-year credit-default contracts on the country’s external debt fell 130 basis points to 435, according to Bloomberg. Finance Minister Kang Man Soo said Korea would seek to expand currency-swap agreements with Japan and China, following the U.S. deal.