[Editorial] Currency swaps as protection against crisis

[한겨레] South Korea and Japan have said they will end a $57 currency-swap agreement at the end of this month, letting the value of bilateral currency swap arrangements return to US $13 billion, the 2008 pre-financial crisis level, from the current $70 billion. It is a shame that the expansion of mutually beneficial currency swap, is drawing to a close, but even more regrettable that the trust necessary for close economic cooperation in the region has been undermined. We cannot help but blame the current outcome on Japan's attitude.

The South Korean government reportedly came to the conclusion that there is no need to extend the currency swap, considering the stable state of financial market and sound macroeconomic conditions. The government said the decision was made based on purely economic grounds, and opened the possibility of cooperation by saying the two countries agreed to cooperate whenever appropriate.

However, the fact that Japan imposed a condition by which it would negotiate only if South Korea first asks for the extension of the currency swap expansion, and South Korea did not ask, suggests there are some political factors at play in this outcome. Japan seems to be using the currency-swap as a means of putting pressure on South Korea, reacting against President Lee Myung-bak's visit to Dokdo in August.

Looking back to how the currency-swap agreement was first made between the two countries, the small-mindedness of Japan becomes evident. Currency swaps work as two countries establish the maximum amount of currency exchange. The system is mutually beneficial. South Korea and Japan set the currency swaps within the larger framework of the Chiang Mai Initiative, a financial agreement launched among 10 nations of ASEAN and South Korea, China, and Japan in 2000. It was made in order to prevent the recurrence of an Asian currency crisis.

Last year, South Korea and Japan agreed to increase the maximum currency swap to $70 billion at a summit meeting. They determined that that amount would be enough to prevent a foreign currency liquidity crisis, given the two countries' economic fundamentals. The end of the currency swap means that a safety valve to shield the East Asian economy from global economic crisis has been ended, despite the fact that the two countries agreed that the expansion of currency swap benefited their economies.

Even though chances that the foreign exchange market is not likely to become as volatile as before, the domestic financial market is still structurally vulnerable to the fluctuations of the global economy. Moreover, there is still no solution to the European financial crisis, meaning that a protracted global recession can't be ruled out. The International Monetary Fund has also pointed out that South Korea needs to have enough strength to shield it from currency crisis. The expansion of currency swaps with other countries could be a means to that end.

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