Financial Crisis Just Starting to Take its Toll

Global financial markets have slightly calmed down after the U.S. government last week announced the biggest bailout in U.S. history to rescue the financial sector.

Though the initial shock of the financial earthquake has subsided, if financial institutions across the world rush to retrieve their capital, which is likely given the liquidity crunch, the reverberating aftershocks will rock global stock markets, experts say.

The financial crisis has increasingly started taking its toll on the real economy in major parts of the world, from the United States to Europe, China and Japan. The Korean economy, which is heavily dependent on exports, is thus facing a tough challenge.

The financial crisis, dubbed by many as the worst since the Great Depression in 1929, has just begun. History shows a recession triggered by a housing price crash takes a minimum of one year to overcome and usually two to three years overall.

“The International Monetary Fund estimates that losses incurred by global financial companies amount to one trillion dollars. But only half of them have been cleared up, which means a further adjustment is coming,” said Kim Jeong-han, a researcher at Korea Institute of Finance, in a report.

In the report, Kim said the U.S. real estate market will see prices fall another 10 percent. “Large financial institutions could scramble to liquidate stocks and bonds in emerging markets, including Korea,” he warned.

The U.S. shock to the real economy is even more threatening. Inflation-adjusted real consumption expenditures of Americans in July shrank 0.4 percent from the previous quarter, the lowest since June 2004. Unemployment soared to 6.1 percent last month from 5.7 percent in July.

Nouriel Roubini, an economics professor at New York University, said the worst economic recession will continue in the United States over the next 12 to 18 months. He had predicted the economic crisis triggered by the U.S. subprime mortgage bust.

Economic downturns in Europe, Japan and other regions are likely to accelerate from next year. According to a report by the Korea Trade-Investment Promotion Agency after surveying Korean companies active in 25 countries, consumption and investment in major economies will visibly slow down next year.

In China, major cities are seeing asset prices fall, causing mortgage amounts to exceed the prices of houses up for sale.

Since the financial crisis is here to stay for the foreseeable future, all economic entities should brace themselves for a prolonged slump, experts say.