SEOUL, July 15 (Xinhua) -- South Korea's top economic policymaker planned to take an initiative in warning over possible "reverse spillover" effects from an early U.S. exit at the upcoming G20 meeting this week, according to a senior official at Seoul's Finance Ministry.
South Korean Finance Minister Hyun Oh-seok planned to take a lead in bringing up an issue of reverse spillover caused by the possible end of bond purchases in the United States and urging the need for international cooperation in tackling the issue, a senior official at the Ministry of Strategy and Finance told foreign correspondents Friday, with his comments embargoed on Monday.
Reverse spillover is new jargon, coined by Minister Hyun, according to the ministry official. The word is a variant of negative spillover effect, claiming that an early exit from U.S. quantitative easing would influence the United States itself as well as emerging economies and other advanced nations.
Bank of Korea (BOK) Governor Kim Choong-soo has repeatedly warned over the negative spillover effects, saying that an early U. S. exit may force emerging nations to hike interest rates to fight against capital outflows.
Global bond yields surged after Federal Reserve Chairman Ben Bernanke mentioned the possible end of its bond purchasing program for the first time in May. Rising interest rates would worsen fiscal soundness in the already-troubled economies in Europe, while triggering foreign capital exodus from emerging economies.
The economics of reverse spillover, in addition, said the early U.S. exit would cause damages to the U.S. economy itself because it would dampen a fledgling recovery in the world's largest economy, which depends on exports for its growth.
If emerging economies sell their holdings of U.S. Treasury bonds to get dollars for the foreign-exchange market protection usage, interest rates in the United States would rise further, preventing the economy from going back on its feet.
Minister Hyun planned to urge the United States to make a prudent decision on the time, pace and way of its exit strategy at the upcoming G20 meeting of finance ministers and central bankers slated for two days through Saturday in Moscow, according to the ministry official.
The upcoming talks will discuss the issue of negative spillovers from quantitative easing in advanced nations via a separate session for the first time, according to the official. India will provide a paper on the issue at the planned talks for G20 economic policymakers.
"One who ties the knots should untie the knots," the official told reporters, saying that a prudent and gradual exit would be in the best interest of the United States as well as of the global economy.
However, doubts remained whether the Finance Ministry untied its knots on the domestic front. The ministry and politicians boosted the possibility for capital exodus from South Korea by helping pressure the central bank to cut policy rates in May.
BOK Governor Kim Choong-soo said following the May rate-setting meeting that the bank lowered its borrowing costs to maximize the effect of supplementary budget worth 17.3 trillion won (15 billion U.S. dollars), hinting that the independent central bank ended up succumbing to external pressure from politicians.
The floor leader of the ruling Saenuri Party said in the previous day of the May monetary policy meeting that the extra budget was not enough in terms of size and contents, while Minister Hyun had stressed over the effectiveness of the policy mix between fiscal and monetary policies.
The policy rate cut, the need of which was urged by the top economic policymaker, came back as a risk factor to boost the foreign capital outflow in South Korea around two months later.
Minister Hyun planned to urge the Fed itself to untie its knots, which it had tied in the process of overcoming the unprecedented global financial crisis, at the upcoming G20 meeting of economic and monetary heads at Moscow.
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