The first rule of swaps

Korean correspondents in Washington D.C. received a round of calls on the evening of Oct. 12, 2017, informing them that policy chiefs from Seoul attending the G20 meeting of finance ministers and central bank governors in the U.S..

Ha Hyun-ockThe author is head of the finance team at the JoongAng Ilbo. Korean correspondents in Washington D.C. received a round of calls on the evening of Oct. 12, 2017, informing them that policy chiefs from Seoul attending the G20 meeting of finance ministers and central bank governors in the U.S. capital would hold a press conference. Then finance minister Kim Dong-yeon and Bank of Korea governor Lee Ju-yeol slipped out of a formal dinner to brief Korean reporters about the extension of a South Korea-China currency swap.

Tensions between Seoul and Beijing at the time were high due to South Korea’s hosting of U.S. antimissile system. A currency swap extension had been in the air. Lee several days previously had denied a JoongAng Ilbo report that the two central governments reached “de facto” agreements to extend the swap’s maturity, saying negotiations had to consider “the other party” and were still ongoing.

But the report had been true, according to sources familiar to the matter. The two authorities have reached agreements in September, a month ahead of the expiry. But the Chinese central bank wished not to make the announcement public due to the diplomatic spat. But Korean authorities argued about the need for an official announcement and persuaded their Chinese counterparts on the sidelines of the G20 meeting in Washington.

The affair from five years ago has been revisited amid brewing discussions on the need of the renewal of a currency swap between Korea and the U.S. as the Korean won nears its weakest point in 13 years against the dollar. Some have been demanding the issue be included in the state agenda during the first summit between Presidents Yoon Suk-yeol and Joe Biden when the U.S. leader visits on May 21. A swap with the U.S. currency could add to security and contain further depreciation of the won.

There is always “the other party” in a swap agreement, and Seoul cannot argue entirely on its need. The Korean currency could become safer under the U.S. dollar umbrella amid looming crisis. But it is up to the U.S. to offer the protection. The U.S. needed a network of currency swaps the last time the U.S. signed and extended the currency swaps with Korean authorities.

According to the record of developments of a currency swap in 2020 amidst the Covid-19 pandemic outbreak in the memoir by then vice finance minister Kim Yong-beom, there had not been a single order to sell the dollar for a minute since market opening in Seoul on March 19, 2020. The dollar jumped to 1,296 won despite verbal intervention from the finance ministry and central bank. The panicky sale of the Korean won eased after the currency entered a swap agreement with the dollar. Washington disclosed the move before Seoul officials flew over to seek the agreement. The U.S. sought currency swaps following $1 trillion of speculative sales of U.S. treasuries in emerging markets.

According to former president Lee Myung-bak’s memoir, then finance minister Kang Man-soo won a currency swap agreement during the onset of a financial crisis in 2008 by arguing Korean authorities could sell holdings of U.S. treasuries to protect the Korean won.

The U.S. central bank leverages a currency swap with other banks to prevent the spillover effect from a shortage of dollars. A French think tank observed the U.S. Federal Reserve was taking up the role as the world’s lender of last resort through currency swaps. The Fed which has been hastening with rate normalization to suck up liquidity that had been widely loosened during the pandemic won’t likely move to strike currency swaps with other countries. The public debate in Korea could bring about an adverse effect. If Seoul fails to enter such an arrangement, it could send the wrong message about the Korean economic condition. A currency swap with another nation is not just a financial but diplomatic policy as seen with the swaps with Japan and China. To borrow a movie title, the work must be led “secretly and greatly.”