(News Focus) Currency swap with U.S. to ease market jitters

(ATTN: UPDATES 16th para with closing prices)
SEOUL, Oct. 30 (Yonhap) -- South Korea's currency swap deal with the U.S. is
expected to help assuage market jitters over banks' dollar shortages and bolster
the local currency, officials and analysts said Thursday.
The U.S. Federal Reserve announced Wednesday that it will sign a currency swap
arrangement of up to US$30 billion each with central banks of South Korea,
Mexico, Brazil and Singapore to be effective until April 30 of next year.
South Korea is now one of 14 countries to have signed such a temporary reciprocal
currency arrangement with the U.S. Washington maintains swap arrangements with 10
of the world's major advanced economies, including Australia, Canada, Denmark,
England, the European Union and Japan.
"The opening of the swap line with the U.S. will likely play a big role in
stabilizing our foreign currency and financial markets," Finance Minister Kang
Man-soo told reporters in a press briefing.
"The Fed's decision will also help accelerate the move to expand similar currency
swap lines with Japan and China, which will intensify concerted efforts among the
three nations to stabilize financial systems in the Asian region."
South Korea has been grappling to stabilize its wobbling financial markets with a
raft of measures in recent weeks as instability increased following the collapse
of major American investment banks last month.
Last week, the Finance Ministry announced that it will provide state guarantees
of up to $100 billion for external debts owed by cash-strapped local banks as
well as injecting $30 billion directly into the financial system.
The Bank of Korea, the nation's central bank, also joined the effort by lowering
its key interest rates by a record 0.75 percentage point to 4.25 percent, a move
aimed at providing more liquidity to the market despite concerns over its
negative impact on the won's rapidly declining value.
Those efforts, however, failed to soothe already-dented market confidence, with
some asking for the resignation of the entire economic policy making team.
Analysts say that the currency swap deal with one of the world's largest
economies will have a "decisive" and "positive" impact on the wobbling local
financial markets.
"The worst seemed to be over," said Jeon Seung-ji, a currency analyst at Samsung
Futures. "The local currency and equity markets have been gripped by overshooting
amid growing concerns over a possible national bankruptcy, but such excessive
moves will very likely disappear down the road thanks to the deal."
"It will also help the government secure more capacity to intervene in the
currency markets when the won's slide is deemed to be too excessive," Jeon added.
Lee Sung-kwon, an economist at Goodmorning Shinhan Securities, echoed the views,
saying that the South Korea-U.S. currency swap deal will provide a "turning
point" to local financial markets which have been on a roller coaster session
over the past months.
"The swap deal will play a decisive role in putting to an end concerns over an
imbalance in demand and supply in the currency markets," Lee said. "This will
pave the ground for the won's turnaround for an upward move in the long term."
"It will also help raise the overall state sovereign credit ratings, which have
been under review since South Korea was excluded from the swap program with the
U.S. The inclusion itself gives positive signals at home and abroad," he added.
The market responded sharply to the announcement on the South Korea-U.S. swap
deal. The won closed up 177 won to close at 1,250 won against the greenback,
while the benchmark stock index jumped 11.95 percent to 1,084.72.
Despite the positive market responses, some still raise concerns that the worst
is not over and that the currency and stock markets have not yet reached bottom
as the prolonged financial turmoil is starting to take a toll on the real
economy.
According to the central bank, the nation's gross domestic product (GDP) grew a
mere 0.6 percent in the third quarter from three months earlier, marking the
slowest growth in four years, due to sluggish domestic demand and lagging export
growth.
The economy, earlier projected to grow 4.7 percent this year, is expected to slow
sharply, with many private think tanks predicting around 4 percent expansion this
year. Growth will further slow next year, they forecast.
Job growth remained stagnant and household debts are growing, a drag on consumer
spending that accounted for around a half of the nation's GDP.
Despite a possible stabilization of the financial markets, many expect that it
will take time for the real economy to get back on track as signs are abundant
that conditions are getting worse rather than better.
South Korea's government acknowledged the concerns and is expected to unveil a
series of economic-stimulus measures to help boost slumping domestic consumption
and kick-start the overall economy.
The Finance Ministry said earlier that it is considering brining up the schedule
of envisioned reductions of income, corporate and real-estate taxes while seeking
additional fiscal spending worth up to 5 trillion won for next year.
"The currency swap deal carries a symbolic meaning in that there are no more
concerns over a national bankruptcy," said Jeon of Samsung Futures. "But things
could take a new turn for the worse if the real economy goes down. Now focus
should be turned to reviving the economy."
kokobj@yna.co.kr
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