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[Editorial] Stock Markets Shouldn’t Panic

Posted October. 27, 2008 22:22,   


Asian stocks plunged yesterday amid widespread fears over the worsening global financial crisis and the looming specter of recession. The benchmark KOSPI fell below the psychological barrier of 1,000 for the first time in 40 months. The tech-heavy KOSDAQ also plummeted to a record low of below 300. Stock markets in Japan, china, Hong Kong and Taiwan also experienced heavy drops.

The defining characteristic of stock markets is “panic.” As foreign investors keep dumping Korean stocks to secure liquidity in emerging markets, many domestic investors have jumped on the bandwagon.

Foreign investors continued their selling spree, dumping 4.5 trillion won worth of stocks this month alone. All told, their net selling this year is an estimated 34 trillion won, the largest since the opening of the Korean stock market in 1992.

Against this background, the government has announced that economic growth slowed to 3.9 percent in third quarter, raising fears that the real economy has slipped into recession.

Many experts, however, say stocks are suffering from excessive panic instead of weak economic fundamentals.

Still, worries remain over a liquidity shortage in financial markets. With Korea`s credit default swaps premium soaring, credit rating agencies and news media have warned of credit risk in Korea.

But the domestic situation is as not serious as those of Pakistan or Iceland, which has applied for a bailout from the International Monetary Fund. Korea is a small country with no significant influence on the global financial stage but has developed a free market system, so it is hard to escape the direct impact of the global financial crisis. But the market response seems a bit overboard.

The government should make efforts to relieve investor anxiety by bailing out the ailing financial sector, and at the same time, trying to revive confidence in the domestic stock market and the won.

Like the United States, Korea must pursue a soft-landing policy for the housing market to remove fears over bursting the housing bubble. If the weak won gains ground against the greenback with the current account balance back in the black, this will prevent foreign capital flight out of the country, along with the U.S. government`s bailout plan worth 250 billion dollars next month.

For its part, the financial sector should come up ways to lower interest rates even after receiving emergency loans as soon as possible. The financial sector, investors and the nation could fall victim to a severe capital shortage even when financial banks are viable. There is no time to engage in a blame game.