Fear of 'Economic Contagion' Spurs Central Banks to Flood Markets with Money... Expectations for Korea-US Currency Swap

"Serious Current Economic Situation" Consensus
Major 6 Central Banks Implement Dollar Swap Rate Cuts
Japan Advances Monetary Policy Meeting
Bank of Korea May Cut Base Rate as Early as Today

Increased Possibility of Korea-US Currency Swap
"If Signed, Concerns Over Foreign Exchange Crisis and Capital Outflow Significantly Reduced"

[Image source=Reuters Yonhap News]

Christine Lagarde, President of the European Central Bank (ECB), and Jerome Powell, Chair of the U.S. Federal Reserve (Fed), embracing each other
[Photo by Reuters]

[Asia Economy Reporters Eunbyeol Kim, Hyunjung Kim, Hyunjin Jung] Major central banks around the world have joined forces to respond to the impact of the novel coronavirus disease (COVID-19). As COVID-19 spread to the United States and Europe, causing panic that severely shook financial markets, central banks decided to lower the dollar swap rates to supply global dollar liquidity. There are signs that China, Japan, and South Korea may also hasten additional monetary easing. Attention is also focused on whether the South Korean government will join the global central bank cooperation by signing a Korea-US currency swap agreement, as it did during the 2008 financial crisis. Professor Soyoung Kim of Seoul National University’s Department of Economics said, “If (the Korea-US currency swap) can be done, it would have a very positive effect,” adding, “If the Korea-US currency swap is implemented, we would have less concern about foreign exchange crises or capital outflows.”

◆Global Central Banks Strengthen Cooperation on Global Liquidity= In order to calm the turmoil in financial markets caused by the spread of COVID-19, central banks around the world are showing signs of additional interest rate cuts following the United States. According to Kyodo News on the 16th, the Bank of Japan (BOJ) will hold its monetary policy meeting, originally scheduled for the 18th to 19th, starting at noon on the 16th. The meeting period has been shortened from two days to one, and the decisions made on that day will be announced. The BOJ explained that the schedule was moved up to “review necessary financial adjustments considering recent financial and economic developments.” This is the first time in nine years since the BOJ advanced its monetary policy meeting, the last being in March 2011 after the Great East Japan Earthquake. The market expects that the BOJ is highly likely to decide on additional monetary easing on this day.

The People’s Bank of China also implemented a selective reserve requirement ratio cut on the same day, supplying an additional 550 billion yuan (approximately 95 trillion won) in liquidity. The Bank of Korea is also expected to hold an emergency Monetary Policy Committee meeting as early as today to implement an interest rate cut.

Earlier that morning (Korean time), the U.S. Federal Reserve (Fed) made a surprise 1 percentage point cut to its benchmark interest rate, and six central banks?including the European Central Bank (ECB), BOJ, Bank of Canada (BOC), Bank of England (BOE), and Swiss National Bank (SNB)?agreed to improve global dollar liquidity through existing dollar swap agreements. They decided to lower the swap rate by 0.25 percentage points and to provide an additional 84-day maturity operation alongside the existing weekly swap operations.

This measure aims to secure liquidity in the key currency, the U.S. dollar, by extending the dollar loan period and making dollar lending easier. Recently, the dollar’s value surged sharply as liquidity in the market decreased. A shortage of dollar liquidity could exacerbate turmoil in global financial markets. The ECB stated in a press release, “We will maintain appropriate pricing and maturity benefits for a suitable period to ensure smooth functioning of the dollar funding market.” Mark Carney, Governor of the BOE, and Andrew Bailey, the incoming Governor, said, “This cooperation will complement the measures taken by central banks and governments, including those announced by the BOE last week,” adding, “It can help prevent confusion caused by economic shocks.”

The six central banks have jointly responded by expanding dollar supply whenever financial markets were severely shaken, such as in December 2007, October 2008, and November 2011. In 2008, five countries excluding Japan simultaneously lowered their benchmark interest rates.

[Image source=Yonhap News]

◆As in 2008... Growing Possibility of Korea-US Currency Swap Agreement= As central banks worldwide cooperate, expectations for a Korea-US currency swap agreement are also rising. Officials from the Ministry of Economy and Finance and the Bank of Korea stated on the day, “South Korea’s external soundness is currently good,” but added, “Having a currency swap with the U.S. as a contingency measure is good for securing a safety net.” It is reported that the government’s COVID-19 contingency plan includes a Korea-US currency swap agreement.

However, the decision rests with the United States. During the 2008 global financial crisis, the Fed signed currency swap agreements with 14 countries including South Korea, most of which ended in 2010. At that time, the ECB and central banks of Canada, the UK, Japan, and Australia first increased their currency swap limits, and emerging countries including South Korea signed additional currency swap agreements in October 2008.

If South Korea signs a currency swap agreement with the U.S., it would be significant in securing a dollar liquidity safety net. It also has strong symbolic value in enhancing trust in international financial markets. In 2008, South Korea’s $30 billion Korea-US currency swap agreement, signed just before its foreign exchange reserves fell below $200 billion, played a decisive role as a bulwark against the financial crisis.

However, as of the end of February this year, South Korea’s foreign exchange reserves stood at $409.2 billion, ranking ninth globally, so a currency swap is not an urgent necessity. Also, unlike in 2008, there is no fundamental problem with the financial system currently. Since the agreement is not signed one-on-one with the U.S. but rather collectively, it is expected to take time to finalize. Earlier, the Wall Street Journal (WSJ) argued that international cooperation such as currency swaps with major countries including South Korea is necessary to stabilize the international financial market shaken by COVID-19. Professor Kim said, “At that time, our government persuaded the U.S. with the logic that if emerging markets including South Korea faced difficulties, the U.S. dollar market would also be affected,” adding, “Since there is precedent, it might be easier this time than back then.”

This content was produced with the assistance of AI translation services.