Will Greek woes curb S. Korean economy's recovery?

19:00, May 07, 2010      

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Amid renewed Greece debt woes shaking global financial markets, the eurozone uncertainties are spilling over to real economy sector as well.

The South Korean economy, known for its vulnerability to external factors, may not be able to escape another massive shock if the European debt problems spread to other major economic blocks.

Despite expert views that the European crisis scenario is not likely at the moment, market participants here, including the watchdog, are growingly cautious over how the current jitters will turn out down the road.


Following the report from Europe that Greece fiscal debt problem may spread to other European countries, the South Korean stock market plunged for two consecutive sessions, 1.98 percent on Thursday and 2.21 percent on Friday.

In total, the European shock chopped around 70 points off the main index KOSPI just in two sessions.

In particular, the current financial turmoil led to massive foreign capital exodus from the local market on Friday.

Foreigners turned net sellers amid eurozone jitters, selling off 1.2 trillion won (1.0 billion U.S. dollar) worth of shares, settling a record amount of share sales.

The South Korean won-U.S. dollar forex rate was also severely shaken amid market jitters as investors turned to the risk-free U. S. dollar.

The local currency, having stayed on a steady rise trend until Wednesday, made a sharp downturn following the report from Europe, breaking the 1,150 won-level against the greenback at the close of Friday.

Plunging near the 1,170-won level at some point during the Friday session, however, the won recovered the 1,150-won mark thanks to exporter' U.S. dollar selling and currency authorities' messages.


Amid financial jitters, South Korea's financial authorities vowed to closely monitor the financial markets, especially keeping eyes on capital flows into and out of the domestic financial market.

"To brace for the possibility that the current jitters diffuse into the entire European region, the Financial Services Commission (FSC) has decided to beef up monitoring on European funds' in- and outflows," the top financial watchdog said in a statement.

Setting up an emergency council, the regulator kicked off its monitoring efforts to look into financial firms' foreign currency positions and their overseas funding capability, as well as the potential of capital flight, the FSC said.

The finance ministry also sent a firm message to the market that the authorities are closely scrutinizing the forex rate move, hinting at a possible intervention.

"(We) believe that the current one-sided bet in the local currency market is not appropriate," an official at the finance ministry was quoted as saying by local MBN, adding that the ministry will do its best to stabilize the foreign currency market.

Interpreting the remarks as the authorities' firm intention to maintain forex market stability, the South Korean won closed the downturn near the 1,550-won level.

South Korean President Lee Myung-bak on Friday also called on leaders of financial circle to thoroughly brace for a possible crisis triggered by European fiscal debts.

"Despite recent progress in the financial sector, we should not loosen up as there are still lingering crisis factors," President Lee said, pointing at eurozone woes.

The high alert by the government reflects the possibility that the current crisis can be led into severe liquidity squeeze once the European countries go into default.

The financial turmoil may in turn cool off market participant sentiment, dragging down the real economy at last, which the South Korean government, along with its global peers, is worrying.


European financial woes, if kept as it is, will stand in the way of South Korea's economic recovery as the issue is closely linked to exports and consumer prices, Yonhap News Agency said.

While South Korea's exports to the region stay on a brisk trend, posting a 14.1 percent on-year growth in April, it still seems likely that a spillover in fiscal debt problem may directly affect demand.

"As outbound shipments to southern Europe take up a small portion of South Korea's exports to the region, it may not spark an urgent problem," an official at the finance ministry was quoted as saying by Yonhap.

However, when the issue spreads to other countries in eurozone, South Korea may not avoid a deteriorated export condition, Yonhap said.

With greater volatility in the forex rate, consumer prices are likely to be hit as well, which will also trigger jitters in consumer spending and corporate investment.

"The longer the crisis grows, the slower the recovery pace will get in the European economic block, posing a negative impact on the South Korean economy as well,"Hwang In-sung, analyst at the Samsung Economic Research Institute, said.

According to Hwang, the lingering European woes will pull down the local currency, placing burden on consumer prices as well.

Source: Xinhua


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