🚨 US Demands $350 Billion Investment, Korea Plays 'Unlimited Currency Swap' Card
Today Korean Economic News for Beginners | 2025.09.16
0️⃣ Foreign Reserves Under 84% Pressure, Exchange Rate Defense Emergency
📌 "Fears of 1997 Foreign Exchange Crisis if Dollars Run Out"... Government Requests Emergency Safety Net from US
💬 The US has demanded Korea invest $350 billion (84% of its foreign exchange reserves) directly in America, putting Korea's foreign exchange market on high alert. Korea currently holds about $416 billion in foreign exchange reserves, and if $350 billion flows out as investment, the country's ability to defend its exchange rate will greatly decrease. In response, the Korean government has raised the need for an 'unlimited currency swap' agreement with the US to prevent another foreign exchange crisis. However, the US has unlimited swap agreements only with reserve currency countries like Japan, the European Central Bank, Britain, Canada, and Switzerland, making it unlikely that Korea's request will be accepted.
1️⃣ Easy Explanation
The US has asked Korea to invest a huge amount of money, which has created big risks for our country's economy. Simply put, it's like being asked to spend most of your emergency savings.
First, let me explain what 'foreign exchange reserves' means. Foreign exchange reserves are the foreign currencies like dollars and euros that a country holds. Korea currently has about $416 billion in foreign exchange reserves, which is the 9th largest amount in the world. This money usually helps keep exchange rates stable and acts like a shield to protect the economy during crisis situations.
But the US has demanded that Korea invest $350 billion of this - that's 84% of the total amount - in America. This is like being forced to invest 84% of your monthly salary somewhere else. It might seem okay for now, but when a sudden crisis happens, you'll have much less ability to respond.
Do you remember the 1997 foreign exchange crisis? Back then, Korea didn't have enough dollars, so the exchange rate shot up, many companies closed down, and unemployment soared. If foreign exchange reserves drop significantly, a similar situation could happen again.
That's why the Korean government suggested making an 'unlimited currency swap' agreement with America. A currency swap is an agreement where two countries can lend each other their currencies. Simply put, it's like saying "I'll give you Korean won, so you lend me dollars." "Unlimited" means you can borrow as much as you need during a crisis.
But the problem is that the US has made such unlimited swap agreements with only a few countries: Japan, Germany, France, Britain, Canada, and Switzerland. These are all countries that have 'reserve currencies' like the dollar, euro, and yen. Korea's won is not yet a reserve currency, so getting an unlimited swap agreement is very difficult.
In the end, Korea is caught in a dilemma between huge investment pressure and foreign exchange risks.
2️⃣ Economic Terms
📕 Foreign Exchange Reserves
Foreign exchange reserves are the total amount of foreign currencies and foreign currency assets that a country holds.
- They mainly consist of foreign currencies like dollars, euros, and yen, plus foreign government bonds and gold.
- They serve as the nation's emergency fund for exchange rate stability, international payments, and crisis response.
- Korea currently maintains $416 billion in foreign exchange reserves, ranking 9th in the world.
📕 Currency Swap
A currency swap is an agreement where two countries can deposit their own currency and borrow the other country's currency.
- It's a safety net that allows emergency access to foreign currency during foreign exchange market instability or liquidity crises.
- An unlimited swap allows borrowing without limits as needed, providing stronger protection.
- The US has unlimited swaps only with reserve currency countries.
📕 Reserve Currency
A reserve currency is a currency that is fundamentally used in international trade and finance.
- Currently, the dollar accounts for over 60% of all international transactions as the main reserve currency.
- The euro, yen, and pound also serve as reserve currencies regionally.
- Reserve currency countries can conduct international transactions in their own currency, reducing exchange rate risks.
📕 Exchange Rate Defense
Exchange rate defense is when monetary authorities intervene in the foreign exchange market to prevent sharp currency fluctuations.
- They stabilize exchange rates by supplying dollars or buying won using foreign exchange reserves.
- The more foreign currency held, the stronger the exchange rate defense capability.
- If foreign exchange reserves are insufficient, exchange rate defense weakens, potentially leading to a currency crisis.
3️⃣ Principles and Economic Outlook
✅ Risks and Impact of Decreasing Foreign Exchange Reserves
Let's analyze the structural impact that large-scale foreign currency outflow could have on Korea's economy.
First, there are concerns about a sharp weakening of exchange rate defense capability. If $350 billion flows out from the current $416 billion in foreign exchange reserves, the actual defense capacity would drop to around $66 billion. This is more than the reserves during the 1997 foreign exchange crisis ($20 billion), but it's very insufficient considering Korea's current economic size. Foreign exchange reserves should typically be maintained at a level equivalent to 3-6 months of import payments to be considered safe, but $66 billion wouldn't even cover one month. Therefore, even small problems in dollar supply and demand could cause the won-dollar exchange rate to surge.
Second, import price increases and inflationary pressure will greatly increase. When exchange rates rise, prices of imports like crude oil, natural gas, and raw materials also rise. Korea depends on imports for most of its energy and raw materials, so the ripple effects of exchange rate increases are very large. For example, if the won-dollar exchange rate rises 15% from 1,300 won to 1,500 won, import prices would increase by an average of 10-12%. This would immediately lead to higher prices for daily necessities, greatly increasing the cost of living for ordinary people. Especially for young working people, increases in basic living costs like rent, transportation, and food could be a big blow.
Third, declining confidence from foreign investors could accelerate capital outflows. If foreign exchange reserves drop sharply, international credit rating agencies would likely downgrade Korea's national credit rating. This could cause foreign investors to sell large amounts of Korean stocks and bonds and take dollars out of the country in a 'capital outflow' phenomenon. During the 1997 foreign exchange crisis, foreign capital flight made the crisis even worse. If this vicious cycle starts, the government would lack the capacity to intervene, risking development into a currency crisis.
Decreasing foreign exchange reserves is not just a number change, but a risk factor that shakes the fundamental stability of Korea's economy.
✅ Reality of Unlimited Currency Swap and Seeking Alternatives
Let's look at the feasibility of Korea's requested unlimited currency swap and realistic alternatives.
First, the US unlimited swap policy is very limited and conservative. Currently, the US Federal Reserve has unlimited currency swap agreements with only five reserve currency issuing institutions: Japan (yen), European Central Bank (euro), Britain (pound), Canada (Canadian dollar), and Switzerland (Swiss franc). They all hold reserve currencies widely used in international transactions along with the dollar, so there's trust that they won't burden the US even during crisis situations. In contrast, Korea's won is not yet recognized as a reserve currency, making it realistically very difficult to get an unlimited swap.
Second, limited-scale currency swaps or conditional agreements might be more realistic alternatives. Even if unlimited is difficult, a limited currency swap of $50-100 billion scale seems negotiable. Korea actually has experience concluding a temporary $30 billion swap with the US during the 2008 financial crisis. Also, adding conditions like "usable only when US investment is implemented" or "activated only in specific crisis situations" would make it easier for the US to accept. The government should focus its negotiation strategy on such realistic alternatives.
Third, building multilateral safety nets and strengthening regional monetary cooperation should also be pursued. Since there are limits to swaps with the US alone, expanding bilateral swaps with China and Japan or utilizing the Chiang Mai Initiative at the ASEAN+3 level should be considered. Also, multilateral safety devices like the IMF's Flexible Credit Line (FCL) or Precautionary Liquidity Line (PLL) should be actively utilized. Building such multi-layered safety nets could reduce dependence on the US while preparing for foreign exchange crises.
While unlimited swaps are difficult, foreign exchange market stability can be secured through various realistic alternatives.
✅ US Investment Demands and Korea's Negotiation Strategy
Let's analyze Korea's realistic response to US investment demands.
First, a strategy to minimize foreign exchange shock by adjusting investment scale and timing is needed. Since investing $350 billion at once is impossible, a method of split investment of $35 billion annually over 10 years could be proposed. This way, annual investment would be only about 8% of current foreign exchange reserves, greatly reducing market shock. Also, investment timing should be adjusted to when exchange rates are stable, and flexible clauses allowing temporary suspension when necessary should be included. The US would likely understand that investment effects would decline if Korea's economy becomes unstable.
Second, investment forms should be diversified to increase recovery possibilities. Rather than simple cash investment, various methods like Korean companies' direct investment in the US, participation in US infrastructure projects, and creation of bilateral joint investment funds could be used. Especially, if the government provides financial support for corporate investments like Samsung Electronics' US semiconductor plant expansion or Hyundai's electric vehicle plant construction, it could reduce actual foreign exchange reserve outflows while meeting investment targets. This approach would also meet the US goal of job creation, satisfying both countries.
Third, the 'tariff effect dilution' logic should be used to increase negotiating power. The Korean government could present the logic that "if foreign exchange reserves decrease and exchange rates rise, the effects the US wanted to achieve through tariffs would be offset." For example, even if the US imposes 20% tariffs on Korean goods, if the won-dollar exchange rate rises 20%, Korean product prices in dollars would return to original levels, eliminating tariff effects. This contradicts US policy goals, so the US would have to consider Korea's foreign exchange stability to some degree. Based on this logic, Korea could demand relaxed investment conditions or currency swap agreements.
While completely refusing US investment demands is difficult, shock can be minimized and safety devices secured through negotiation.
4️⃣ In Conclusion
The US demand for $350 billion investment is a big threat to Korea's foreign exchange market, but it's also an opportunity to newly define Korea-US relations. The key lies in 'smart negotiation' that reduces investment burden while securing foreign exchange safety nets.
Above all, we must keep in mind that 84% of foreign exchange reserves flowing out at once is realistically impossible. This would be suicidal for Korea's economy, so the US probably won't make such extreme demands either. Therefore, negotiation to properly adjust investment scale and timing is crucial.
Unlimited currency swap is ideal but lacks realism. Instead, limited swaps of $50-100 billion scale or conditional agreements are more feasible alternatives. Also, bilateral swaps with China and Japan or multilateral safety nets should be utilized together.
Investment methods should also be diversified into forms like Korean companies' direct US investment or bilateral joint projects rather than simple cash support. This way, actual foreign exchange outflow can be reduced while satisfying investment targets.
During negotiations, the 'tariff effect dilution' logic should be actively used. By emphasizing that exchange rate increases offset the effects of US tariff policies, the US would have to consider Korea's foreign exchange stability to some degree.
In the end, this situation is both a crisis and an opportunity. It could become a turning point where Korea minimizes foreign exchange risks while upgrading Korea-US economic cooperation to the next level.
Financial beginners and young workers should use this opportunity to understand the importance of exchange rates and foreign exchange reserves, and pay more attention to global economic news. Exchange rate fluctuations directly affect overseas travel, online shopping, and prices of daily necessities.
Table of Contents