Fears of a new financial crisis stoked by last week’s market turmoil


For South Korea, where memories of two major financial upheavals in the late 1990s and 2008 are fresh, the dramatic nosedive of the Seoul bourse on Friday raised investor fears of a third financial crisis.

The pattern was eerily familiar. The rout on Wall Street on Thursday led to a steep fall in Korean shares the next day. The shock from the KOSPI stock market shook up the foreign exchange trade, dragging down the value of the Korean won against the U.S. dollar. 

Local investors hit the panic button, with shares plunging across the board and a flurry of warnings from authorities and brokerages intent on calming down the jittery sentiment of investors, with little effect.

Although it is too early to call another financial crisis, what’s certain is that the majority of factors affecting stock, bond and foreign exchange markets display negative signals, with signs of relief nowhere to be seen.

“The downgrade of the U.S. credit rating is widely expected to affect the market sentiment negatively,” said Shin Hwan-jong, analyst at Woori Investment & Securities.

Standard & Poor’s stripped the U.S. of its top-tier AAA credit rating on Friday, sparking concerns among investors that the U.S. might face an uphill battle in getting its slowing economy back on track. The U.S. economy grew 1.3 percent in the second quarter of this year, below market expectations.

The credit rating downgrade for the U.S. heightened the possibility that the U.S. economy, a key market for export-dependent Korea, might fall into a “double-dip” recession. The debt crisis in Europe also weighed down on local investors throughout last week.

These factors combined to batter the stock market. The KOSPI tumbled 3.7 percent to close at 1,945.75 on Friday, the lowest close since March 15. In the last four sessions, the KOSPI lost about 10 percent, and market watchers noted that investors were unnerved by the index’s fall below the psychologically important 2,000 point level for the first time in five months. The Korean won ended at 1,067.4 won, a five-week low against the greenback.

The Dow Jones industrial average finished up at 11,444.61 Friday, eking out a meager gain of 60.93 points after staging the worst weekly performance since March 2009. Other markets around the world also faced a sharp sell-off last week as investors continued to pull their funds away from stocks to what they perceived as safer channels.

“Another impact is likely to hit the market soon following the U.S. credit downgrade, and the question is whether the U.S. would really let its economy into a recession,” said Park Yeon-chae, research head at Kiwoom Securities. “Investors should brace for more fluctuations as the Korean economy remains susceptible to external shocks.”

With the markets across the globe distressed and edgy, the Korean policymakers now face a daunting task of juggling their limited policy options to rein in runaway inflation and simultaneously keep the economy from hitting a rut.

The country’s consumer prices jumped 4.7 percent last month from a year earlier, marking a level higher than the government’s target range of 4 percent for seven months in a row. Just a couple of weeks earlier, analysts focused on the rising prices for arguing that the Bank of Korea might raise the key interest rate in its forthcoming rate-setting meeting slated for Aug. 11, but its decision is now anyone’s guess in the aftermath of the sharp fall of the stock markets and fast-deteriorating external factors on Friday.

By Yang Sung-jin (insight@heraldcorp.com)