September 2, 2010

South Korea calls for financial safety net

NEW YORK

South Korea’s central bank governor has urged creation of a global financial safety net to deal with future fast-spreading crises among intertwined economies.

South Korea’s economy, which has shown remarkable resilience following the meltdown sparked by the 2008 collapse of the U.S. investment bank Lehman Brothers, can be a model for the world economy, Kim Choong-soo also said at an event sponsored by The Korea Society.

South Korea still feels bitterness over a painful international financial bailout during the 1997 Asian currency crisis, and Seoul has emerged as a leading voice in efforts to help other countries that may need aid in the future.

South Korea will host the next meeting of the Group of 20 major industrial nations in November.

Asia’s fourth-largest economy, South Korea is one of the world’s major exporting nations and has recorded six straight quarters of growth after contracting amid the most recent worldwide downturn, propelled by record-low interest rates, government stimulus spending and robust exports.

Korea, however, wasn’t immune to the meltdown.

In making his argument for a global financial safety net, Kim said foreign market turmoil hurt Korea, despite its sound financial systems and foreign exchange holdings meant to buffer against outside shock.

So-called currency swap lines between countries’ central banks, he said, could be used to create a safety net that could stop crises before they start and, for those that do spread, help ease the pain by supplementing countries’ foreign exchange reserves.

He said a swap between the U.S. and Korea allowed Seoul to quickly bounce back from the hit it took after Lehman’s collapse.

In past swaps, the U.S. central bank has lent much-in-demand dollars to other central banks in exchange for their currencies.

In turn, the central banks lent the dollars out to their banks to prevent trouble from spreading further.

“Under the global economic system in which we live, there are inevitably limits to what any one single country can do, and, in this respect, its efforts need to be underpinned by the construction of a global financial safety net,’’ Kim said.

Seoul, Kim said, is also working with the International Monetary Fund on a new emergency loan program to reduce the stigma that countries have faced when dealing with the globe’s economic rescue squad.

The IMF came under severe criticism during the 1997 crisis for the stringent conditions it imposed on countries in return for aid.

In response, the IMF has shown greater flexibility in the loans it has extended for countries caught up in the latest crisis.

Associated Press

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