Policy Responses To North Korean Provocation

To: Jeung-Hyun Yoon, Minister of Strategy and Finance

From: Kimchi Park, Department of Crisis Management, MOSF

Bottom Line:Recommend approving plan for monetary policy in case of unusually large NK attack.

Currently…Status-quo of “low level” provocations

e.g. ROKS Cheonan, Yeonpyeong IslandLow casualties (< 50-100 dead), relatively infrequent (≥ six

months)

…Market Confidence

Crying wolf

Currency Reaction to Yeonpyeong

Contingency plan activated…

Non status-quo provocationi.e. larger and/or sooner than

usualMarket reaction would be

stronger

For:

Contingency Plan Activated…By…ObservationHotline partners

Financial and foreign exchange authorities

Commercial banks

Objectives

2. Stabilize exchange rate

3. Prevent massive losses in stock market

4. Preserve trade in resources and commodities

1. Prevent market panic and herd behavior

Contingency PlanPrevent capital outflow:

Close KOSPI stock exchangeExempt foreigners from

withholding taxTax funds remitted abroad

Maintain exchange rate:Purchase won with large foreign reserves

Public relations:Press conferencesCredit rating agencies

Bottom LineKorean economy relatively

resistant to exogenous shocksIncreasing tradeCurrent account surplusHigh savings rateLarge foreign reservesUS support

Market shows history of confidence in KoreaLack of confidence in North Korean credibility

President Lee Myung-bak

But…

“Let’s smash them with a single blow!”

Questions?

Currency Reaction to Cheonan