Fed Rescues South Korea
Forbes
Tina Wang
October 30, 2008

As South Korea ran into a severe scarcity of dollars amid the global credit crisis, the U.S. Federal Reserve lent a helping hand, providing a multibillion-dollar line of liquidity to the country's central bank. The move will help stem the won's steep slide, which has made borrowing from abroad more expensive and raised concerns about South Korea's risk of default.

The Fed said Wednesday it had extended a $30 billion swap line to each of the central banks of South Korea, Singapore, Brazil and Mexico that will last until April 30, 2009. It moved to help stabilize these "large and systemically important economies" as the global credit crisis, spread to emerging markets, according to a statement.

"I think it was a very good move and has been well-received in the foreign exchange markets today," said Bill Belchere, a Hong Kong-based economist for Macquarie Securities. "In terms of alleviating market fears of an immediate dollar liquidity crunch, that's resolved with these spot line agreements."

The news comes as a relief for South Korea, which relies more heavily on short-term foreign financing than its East Asian neighbors. (See "South Korea Is Looking Like East Asia's Weakest Link.") The government has sufficient foreign exchange reserves to defend itself against speculators, but the Fed action helps ease the pressure exerted by the cyclical downturn on the country's balance of payments over the next two quarters, Belchere said. Seoul had already moved to shore up the banking system by guaranteeing banks' foreign debt. (See "S. Korea Tries To Buck Up Banks.") The Fed action also comes after East Asian countries set up their own multibillion-dollar fund in case of a liquidity crunch. (See "An Emergency Fund For Asian Nations Seeded With $80B.")

The Fed's move helped push down the cost of foreign credit for Asia on Thursday. Interbank overnight dollar deposit rates fell to a range of 0.75% to 1.0% in Hong Kong, down from 0.9% to 1.1% on Wednesday. Creditors also appeared to have eased their concerns about South Korea's risk of default. The premium on South Korea's five-year credit default swaps, contracts that insure against default, fell 120 basis points, to 440, down from 700 basis points Monday

The won climbed 9.9% against the dollar Thursday, bringing relief to banks and companies squeezed by severe dollar funding shortages as a consequence of the won's 30% slide this year. (See "Korea Looks After Number Won.") Still, the won's gains will be limited and hard to sustain because of the toll the global slowdown is exacting on South Korea's export-reliant economy, Belchere said.

--Reuters contributed to this article.

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