By Matt Underwood Korea Requests Unlimited Currency Swap from U.S. Government, and the implications are significant. This request, a demand for a potentially massive currency swap agreement, immediately raises eyebrows, as these kinds of arrangements are typically reserved for times of extreme financial distress, much like the 2008 global financial crisis or the more recent challenges of the COVID-19 pandemic. The fact that South Korea is seeking this now suggests they’re facing some significant hurdles in their plans to invest heavily in the United States.
At its core, the issue revolves around South Korea’s commitment to invest a substantial sum, reportedly around $350 billion, in the U.S. This investment, however, poses two major problems for them. First, using their existing foreign exchange reserves, primarily in U.S. dollars, to make these investments would seriously deplete their dollar holdings, potentially leaving them vulnerable. Second, buying the necessary U.S. dollars in the open market would require selling their own currency, the won, which could trigger a sharp decline in its value, destabilizing their own financial markets.
To circumvent these difficulties, South Korea is proposing a currency swap with the U.S. government. Essentially, they’re asking the U.S. to accept won in exchange for U.S. dollars. This would allow them to obtain the dollars needed for investment without tapping into their reserves or destabilizing their currency. They would essentially create new won “out of thin air” to buy the USD and then invest.
However, this arrangement presents significant risks for the United States. By accepting won, the U.S. would be holding a large amount of a foreign currency. If the value of the won were to decline in the future, the U.S. would suffer a financial loss. Additionally, when the U.S. eventually decides to exit its won position, it would have to sell those won back into the market. If done too quickly, this selling could further depress the won’s value, exacerbating the losses. The U.S. would have to liquidate these reserves over several years, in a manner that doesn’t crash the won’s value.
One of the key advantages for South Korea in this scenario is that it effectively avoids the volatility of the open market. This can be seen as a strategic move, possibly a tactic to buy time or possibly to walk away, since the agreement will likely take months or years to negotiate. The U.S. could find itself in a position where it becomes indirectly involved in managing South Korea’s financial stability, which is why the unlimited nature of this request is notable.
The economic implications of the proposal are complex. Some suggest that this could be seen as a form of money laundering, though that would depend on the details of the agreement and the ultimate destination of the funds. Others point out that the “trade deficit” advantages for the U.S. could potentially disappear under this arrangement, as the usual mechanisms of currency exchange are bypassed. However, the key issue here is the shift of risk. South Korea wants to move the currency exchange risk onto the U.S..
Furthermore, the context of the U.S.-South Korea relationship adds another layer of complexity. The recent incident involving the Hyundai factory raid is worth noting as well. The potential raid of South Korean factory workers in the U.S. and their treatment may have played a role in the talks and increased their bargaining power. Whether this currency swap is part of a longer-term plan by South Korea, is unclear.
Ultimately, the request for an unlimited currency swap is a bold move by South Korea. It highlights the challenges they face in investing in the U.S. and places significant financial risk on the United States. This kind of financial maneuver, particularly on this scale, should be closely scrutinized.