Left Flank

Now that the ROK and US have signed a currency swap agreement, will anyone acknowledge the respect?

The agreement allows the Bank of Korea to deposit money in won in the Fed for a certain period of time and take out U.S. dollars. This will help Korea secure and maintain foreign currency reserves and help stabilize the won.

For what it's worth, American investment banks insist that the South Korean won is undervalued. South Korean small-and medium-sized business owners agree, taking umbrage at the KIKO agreements they signed last year.

Some small- and medium-sized companies are teetering on the verge of collapse as the won continues to weaken because of their involvement in knock-in, knock-out (KIKO) currency-hedging contracts. According to the Korea Federation of Small and Medium Businesses, things will get worse for most small- and medium-sized companies at home if the won falls to the level of 1,500 versus the dollar. Kim Tae-hwan, head of KFSMB's trade division, said, «Companies with KIKO contracts will incur combined losses of 330 billion won (US$225 million) every time the currency falls by 100 won, so most of them will be facing bankruptcy if the won falls to the level of 1,500 versus the dollar. Other small- and medium-sized companies are grappling with the double whammy of rising raw materials prices and calls from clients to cut the price of their inventory.»

The owner of a company located in the city of Ansan, Gyeonggi Province, who is only identified by the surname Kim, is having sleepless nights these days because of damage from the KIKO contract he signed last year. He is more concerned about next year, however, when he will be required to pay double the amount of the options contract to his bank, or $300,000 a month, if the won falls further beyond the contracted range. «I'm hoping the government will initiate measures for small- and medium-sized companies, but don't expect them to affect me much because the government budget is relatively small,» Kim said. «Then, I am more concerned about whether I will be able to manage my company next year.»

The won's sharp decline is making things especially difficult for small- and medium-sized companies. A company in the city of Changwon, South Gyeongsang Province, is grappling with calls from clients to cut the prices of its inventory. One company official said, «As the won falls, buyers in the U.S. and Japan are asking us to cut our prices. We are delaying making any decisions, telling them we want to see what will happen in three months.»

According to a survey of 147 small- and medium-sized exporters conducted by the KFSMB, the won should be valued at 999.72 won versus the dollar and 992.9 won versus 100 Japanese yen. The won's current value is more than 50 percent less than what they say is appropriate.

But wait, screams Drambuie Man, about all the profits made on previous KIKO agreements? Still I'm not going to praise Ben Bernanke for pouring a little water on the fire by allowing currency swaps to token middle-tier economies, like Brazil, Mexico, Singapore, and ROK. Seoul would also most likely qualify for IMF help, too, although South Koreans would probably return to the streets in outrage rather than actually take a loan again.

Dani Rodrik praises and then asks, «Will the amounts involved be enough? And what will happen to countries that are not named in the Fed program or will not qualify for the IMF's new facility?» Yves Smith decries «...the lack of detail as to the size of this program.» Daniel Altman is just plain against both the swaps and IMF help.

Those countries and others may see their currencies plunge steeply against the dollar, which will make it harder for them to pay any dollar-denominated debts. But currency devaluation is not just an effect of the crisis; it is a policy that many of these countries will pursue to keep their exports competitive. Deep devaluations against the dollar will prolong the problem of global trade imbalances, possibly extending the current economic downturn in the United States and the rest of the world. By offering aid, the Fed and the fund are making devaluation more attractive. Their action may even increase the probability of defaults by developing countries, if those governments devalue too much. So is it really in the Fed and the fund's best interests?

Such Fed triage is risky when there really is no reform plan for the global financial system. Seoul has to stimulate domestic demand instead of banking on the US and EU to buy it out of its problems. At some point, too, correcting the cozy relationships between banks and holding companies would be a pleasant surprise, since the current regime will most likely stymie any future calls for international reform.

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