Korean Economy Facing Three Economic Woes

In the wake of the liquidity crisis of America’s fifth largest investment bank Bear Stearns and the subsequent chaos in the global financial market, the Korean won as well as stock and bond markets plunged on Monday.

On March 16, JPMorgan Chase said it would buy the 85-year-old financial firm for $236 million, or $2 per share. The U.S. Federal Reserve Board simultaneously lowered its discount rate by 25 basis points to 3.25 percent, in order to ease interest rate burden on financial firms.

At the Seoul foreign exchange market, the won-dollar exchange rate soared 31.90 won to 1,029.20 won per dollar yesterday, recording a four digit-number for the first time in 27 months. The won has also fallen against the Japanese yen. The won-yen exchange rate jumped 66.30 won to reach 1,061.60 won per 100 yen.

Kwon Wu-hyeon, a manager of Woori Bank’s Foreign Exchange Market Unit, said, “Even though the FRB lowered discount rate, the demand for dollars rose since increasingly more people are avoiding risky assets.”

The nation’s benchmark KOSPI fell 25.82 points (1.61 percent) to close at 1,574.44 on Monday, setting a new low in ten months since May 4, 2007, when it dropped to 1,567.74. During the day, the index even tumbled to 1,537.53 at one point since foreign investors dumped Korean stocks.

Stocks also dived in other Asian markets. Japan’s Nikkei Average Stock Index fell 3.71 percent and China’s Shanghai Composite Index dropped 3.60 percent.

Bond yields also surged, which means bond prices fell. Five-year government bond yields increased 8 basis points from last weekend to 5.36 percent and three-year ones also increased 8 basis points to 5.33 percent.

The FRB announced on Sunday it would approve a $30 billion credit line to help JPMorgan Chase acquire Bear Sterns. It also extended the maximum term of discount-window loans to 90 days from 30 days.

kong@donga.com higgledy@donga.com