Currency Swap With US Mulled Amid Market Chaos

Compounded by the fiscal crisis in southern Europe and inter-Korean tension, the plummet in the value of the South Korean won and stock prices are putting the domestic financial market into panic.

The South Korean government and the Bank of Korea began acting Tuesday to prevent foreigners from pulling their funds out of the market by seeking a bilateral currency swap. The swap was introduced in October 2008 after the global financial crisis erupted and ended Feb. 1 this year.

The government and the Bank of Korea, which conducted large-scale intervention in the foreign exchange market Tuesday to prevent the won from weakening further, considered preemptive measures to restore stability to the financial market.

A high-ranking officer at the central bank said, “We are seriously considering signing a currency swap with the U.S. like we did after the global financial crisis broke out to prepare for risks from North Korea.”

The won’s value dropped 35.5 points to close at 1,250 to the dollar Tuesday, the weakest since 1,255.8 in August last year. The drop was also the largest since a plunge of 43.5 points in March last year. The won-dollar exchange rate has risen 103.4 points over four business days since May 19.

The benchmark stock index KOSPI dropped 44.1 points (2.75 percent) to close at 1,560.83, the lowest since 1,552.79 Feb. 8. Foreign investors net sold 587.5 billion won (461.8 million dollars) worth of stocks, bringing their combined net sales to 5.97 trillion won (4.69 billion dollars) this month.

Institutional investors including pension funds bought stocks sold by foreigners, but this was not enough to cover the sharp fall.

In addition to the southern European financial crisis and geopolitical risks on the Korean Peninsula, investment confidence was further dampened on the news that the North’s forces are preparing for war according to the NK Intellectuals’ Alliance, a group of former North Korean scholars who defected to the South.

After the news spread, the won fell 27.9 points for seven minutes to reach the 1,270 level.

Because Spain’s central bank decided to nationalize CajaSur, the country’s largest savings bank, fears grew that the financial crisis originating in Greece and Portugal could spread to Spain, Europe’s fourth-largest economy, experts said. They added that rising tension from the sinking of the Cheonan also led to a chaotic situation in the Korean financial market.

jaeyuna@donga.com legman@donga.com