Korea holding breath over Greek debt crisis

By Kang Seung-woo
Staff reporter

The financial malaise created by the debt crisis in Greece has swept through the global financial market, renewing fears that the world will go through another economic meltdown akin to the one triggered by the collapse of Lehman Brothers.

It still remains to be seen whether it is the harbinger of another financial storm that will travel across the globe or only one of the passing economic hiccups that lie in the path to the full recovery of the global economy.

However, one thing that is obvious is that Europe's debt fiasco is a double-edged sword in regards to Korea. It will have a negative impact on the local economy in the short term as the turmoil is expected to destabilize the financial market and delay the complete recovery.

The other side of the coin is that depending on how to cope with it, South Korea will be able to strengthen its position in the global community by capitalizing on the fall of Europe, which has shared the global economy with the U.S. over the past few decades.

Contagion of fears

Korean policymakers have been on alert over the fallout from Europe's debt problems as fears of another crisis have sent foreign investors scrambling for the exits from Korea, sending the local financial markets into a tailspin.

Foreign investors cashed out a record amount of money from Seoul's stock market Friday, pulling down the KOSPI index by 2.21 percent. Foreigners sold 1.24 trillion won worth of shares, which was the highest selling by overseas investors in the history of Seoul's main bourse.

Since Thursday, foreign selling at the KOSPI market has amounted to almost 2 trillion won ($1.75 billion). The main stock index closed at 1,647.50, down 5.4 percent from a week ago. The won also fell 1.24 percent to close at 1,155.40 won.

Despite the market crash caused by the sudden shockwave from the Greek fiscal woes, policymakers and analysts expect that the impact will be limited as its economy has very low exposure to Europe both in terms of debts and trade.

The Ministry of Strategy and Finance emphasized Friday that there is a remote chance of the current European trouble turning into a second global financial crisis, and made it clear that the aftermath of the fiscal problem is limited.

``There is a low possibility for another global financial crisis to happen and that is what the International Monetary Fund (IMF) asserted,'' said Yoon Jong-won, director general of the Economic Policy Bureau.

``South Korea's investment in Europe accounts for two percent overall and the exports to Europe takes up 10 percent of total exports. As for Southern Europe, its investment in Korea is not that high for the whole of Europe. Nonetheless, we are on alert for the current situation and will come up with solutions considering all possible options.''

Economists are doubtful about whether the European economy will get worse after the Greek fallout spreads to neighboring nations.

``If the current fiscal crisis continues, South Korea will be in jeopardy, but I do not think it will,'' said Hwang In-seong, vice president of Samsung Economic Research Institute."

Not as severe as Great Recession

``Given that the extent of Greece's crisis is already known and it is limited to Southern Europe, it is not the same case as the Lehman Brothers, and there will not be as big of an impact.

``If an EU-level support package is implemented, the crisis will get better. It will not linger too long.''

Lee Chang-seon, managing director of the financial research department at LG Economic Research Institute, was on the same lines on the issue.

``It depends on how much further this issue progresses. If it just ends in Greece and Portugal, it will be okay because of the low interaction with them, but if it reaches Spain, it can be a problem due to its size," he said. The Spanish economy is the euro zone's fourth-largest.

In addition, if the crisis hit Spain, concerns will rise and foreign investment be withdrawn, which is likely to stir the local financial market.

``Fortunately, the United States and European countries are taking the situation seriously and are trying to hammer it out, so there will be no contagion to the vicinity,'' he added.

Meanwhile, financial regulators - the Financial Services Commission (FSC) and Financial Supervisory Service (FSS) - said Friday that it would closely monitor market development and set up an emergency council to monitor financial firms' foreign currency positions and their overseas funding capability, as well as the potential of capital flight.

``In preparation for the possibility of the current jitters diffusing into the entire European region, the FSC has decided to ratchet up monitoring of the financial market and European funds' in- and outflows,'' the top financial watchdog said in a statement.

Zero sum game

Following the Wall Street crisis, U.S. hegemony has been gradually eclipsed by the rise of new economic powers such as China, Brazil and India. The debt crisis in Europe is expected to speed up the ongoing power shift that is moving the center of global politics and economics toward the East from the West, as the current crisis is slowing Europe's recovery more than in other parts of the world.

The German economy contracted by five percent last year and Britain also posted a negative growth of 4.9 percent, along with Greece at minus two percent and Spain at minus 3.6 percent with the United States at minus 2.4 percent last year.

In contrast, major Asian economies enjoyed robust growth despite the economic crisis. The Chinese economy jumped by 8.7 percent last year and soared 11.9 in the Jan.-to-March period from a year ago. Korea, which recorded a 0.2 percent growth in 2009, surged 7.8 percent in the first three months of 2010.

As a result, the region is expected to play a more important role in the world economy in the post-crisis era.

``The Asian markets will attract more attention than before. Asian nations, such as China and India, have tallied solid growth rates, so neighborhoods are enjoying the side-effects,'' Lee said

``Asian bonds draw interest because they are seen as safe assets thanks to a sound financial and economic status,'' he added.

Hwang also predicts a brighter prospect on the Asian market.

``In terms of money flows, Asia has more potential because its economy is now considered more resilient,'' he said.

Analysts advise Korean policymakers to put their heads together to become a winner in the post-crisis era. They suggested a two-pronged approach ― an internal and external move.

Internally, Korea should make an all-out effort to fix the nation's fiscal balance sheet to head off a debt crisis. Externally, it is urgent to sharpen the competitive edge of local exporters by diversifying export destinations and boosting research & development, they said.