Sunday, May 30, 2010

Instutionalization of currency swaps

By Eunkyung Seo May 30 (Bloomberg) -- South Korea proposed a permanent arrangement for central banks to swap foreign currencies to help address the type of funding shortages that emerged during the global financial crisis.
The “broadening and institutionalization” of the measures could help establish “a global financial safety net,” Bank of Korea Governor Kim Choong Soo said in the text of a speech to be delivered tomorrow in Seoul at a conference of central bankers.
Kim’s proposal comes five days before Group of 20 finance chiefs gather to discuss strengthening efforts to prevent financial crises. Federal Reserve Chairman Ben S. Bernanke, who’s among officials due to speak to the Korean forum, has opposed swaps as a “permanent service,” seeking instead to pressure banks into better managing their funding needs across different currencies.
South Korea’s Kim said his proposal could cut the need for emerging economies to hold large quantities of foreign-exchange reserves as insurance at a “substantial” economic cost. His comments were for a two-day forum, hosted by his bank, on “The Changing Role of Central Banks.”  ---
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Comment: It is high time to find a way out of the absurdity that in order to gain a safety net, emerging market economies need to accumulate foreign exchange, mainly in US dollars, and thus inadvertently finance the American debt orgy.

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