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Bank of Korea Governor Lee Ju-yeol and Bank of Canada Governor Stephen Poloz sign an agreement to conclude a currency swap at the headquarters of the Bank of Canada in Ottawa on Nov. 15. (provided by Bank of Canada) 　

South Korea has signed an agreement for an unlimited currency swap with Canada that includes no ceiling or end date. With the Canadian dollar effectively serving as a key currency, observers said the deal means Seoul has acquired a powerful safety value in the event of a foreign exchange crisis.

The Bank of Korea (BOK) announced on Nov. 15 that governor Lee Ju-yeol had visited the Bank of Canada in Ottawa to conclude the won-Canadian dollar swap deal with its governor Stephen Poloz. A currency swap is a credit agreement between central banks for the exchange of their respective currencies, which is designed to use foreign currency to ensure financial stability and a liquidity supply for financial institutions at home if a foreign exchange crisis occurs.

The swap deal is a permanent contract that does not specify a ceiling or end date in advance. The BOK explained that it was the “same format as the currency swaps among the six major key currencies (the US, Eurozone, Japan, the UK, Switzerland, and Canada), which are known to provide indefinite and unlimited support.”

“This is the first time South Korea has signed a currency swap like this,” it said.

The BOK described Canada as an “advanced economy with a stable economy and financial market that has earned the highest national credit rating,” and the Canadian dollar as “a major international currency that ranks sixth for foreign exchange transaction scale.” Canada’s currency swap deal with South Korea is its second with a country that does not account for one of the five key currencies, after China.

South Korea has reached currency swap deals totaling US$116.8 billion, including US$56.0 billion with China, US$10.0 billion with Indonesia, US$7.7 billion with Australia, US$4.7 billion with Malaysia, and US$3.84 billion with the Chiang Mai Initiative Multilateralization (CMIM), a multilateral financial safety net with China, Japan, and ASEAN members. It is also in talks with the United Arab Emirates (UAE) to extend a US$5.4 billion swap.

The BOK described the deal as “recognition of South Korea’s economic and financial stability and future development potential by a major advanced economy” and predicted it would have a “positive effect in boosting our credit rating.” It also predicted the deal would “contribute to promoting mutual economic and financial sector cooperation with Canada as a major trading partner.” Trade between South Korea and Canada amounted to US$8.83 billion last year (US$4.89 billion in exports and US$3.94 billion in imports), with a Free Trade Agreement (FTA) in effect since 2015. South Korea is Canada’s ninth biggest trade partner, while Canada is South Korea’s 21st.

“We had been having discussions for several months, and recently the pace picked up sharply and we saw results,” said Lee Ju-yeol.

“It amounts to a promise by Canada as a key currency nation to back South Korea up if its finances are in trouble, and because there is no end date, we do not need to have discussions on an extension every few years,” he explained.

“We’ve arranged a great safety valve [in the event of a foreign exchange crisis],” he said.

By Lee Soon-hyuk, staff reporter

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