from Follow the Money

Korea can not make up its mind either: are they for currency intervention or against it?

May 19, 2005

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First, South Korea opts out of the Bretton Woods 2 system of reserve financing. That would be the first really big outright public defection. Korea has lots of reserves -- and its central bank clearly thinks it doesn’t need any more.

"I believe that we now have sufficient reserves to secure our sovereign credibility, so I do not anticipate increasing the amount of foreign reserves further," Park Seung [Governor of the Bank of Korea] told the Financial Times. South Korea’s foreign currency reserves stand at $206bn the fourth largest in the world.

Then, it gets right back in.

(Continues)

Currency traders said it appeared that the central bank in fact bought dollar-denominated assets on Thursday morning, less than 24 hours after Park Seung, the governor, told the Financial Times that he did not "anticipate" doing so. When asked during the interview if that meant the bank would not be intervening in the foreign exchange markets, Mr Park responded: "No, no, we will not be intervening."

The central bank on Thursday confirmed that Mr Park had been quoted accurately but it nevertheless released a statement saying that he had been "misunderstood." "The Bank of Korea will take necessary measures whenever the currency markets are unstable. Especially, we will not sit idly by if speculative funds come in to exploit a groundless news report," it said.

What is going on? It sure seems like the Bank of Korea (the central bank) and the Ministry of Finance (if not the entire government) are in somewhat different places. The Finance Ministry is worried about any slowdown in growth, and Korea’s export growth seems to be slowing. This policy dispute just played out in a very public way.

But I also suspect it indicates that continued intervention creates very real costs. Korea pays a real coupon on its sterilization bonds, and the Koreans lost lots of money last year when the won appreciated 17% despite their intervention -- buying assets for say 1100 now worth 1000 doesn’t make anyone rich. But Korea also worries about its export sector, like everyone else. Korea neither wants to intervene further or see the won fall further. At some point, though, they are likely to have to choose.

More on:

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