Credit Crisis, Real Economy Locked in Vicious Cycle

○ Daunting challenges for financial market

The shocks on the Korean financial market are coming from two sources. First, fears over the slowing real economy are impacting global stock markets, leading to reduced investment in the Korean financial market. Second, the ramifications of the global financial crisis are affecting Korean exports, increasing worry over poor corporate performance and bankruptcy.

At the moment, no solution is in sight to resolve the global financial crisis. Fear has replaced expectation in the minds of most investors.

In the United States, the potential bankruptcy of the “Big Three” carmakers is raising the specter of inflation, unemployment and a sluggish housing market.

Consumer prices rose for the third consecutive month to fuel deflation fears, and new housing construction plunged to its lowest level on record. The European and Japanese economies are in recession, and a state of panic and uncertainty over the additional collapse of more global financial giants prevail in the markets.

Faced with such uncertainty, foreign investors dumped Korean stocks for the eighth consecutive trading day yesterday. Their pullout of dollars from their Korean stocks also fueled the country’s dollar shortage and weakened the won.

The domestic situation is no better. The financial difficulties of construction companies and small and medium-size shipbuilders have put a damper on stock prices, with their slow restructuring feeding market anxiety. Government policies on liquidity flow and interest rate cuts are losing their effectiveness, with more banks suffering from worsening soundness.

A senior official at the Financial Services Commission said, “Since financial companies in advanced economies are eager to recollect their assets and raise funds, domestic banks face trouble borrowing foreign capital.”

○ Year’s end to prove crucial

Experts warn that the end of the year could see a more severe crisis, with corporations and financial banks rushing to settle their accounts. This is because banks will recollect loans to meet their equity capital rates and companies will seek funds to repay loans, resulting in a lack of liquidity in the markets.

“As the season of accounts settlement approaches, stock and foreign exchange markets will grow more anxious if foreign investors continue their selling spree. In addition, bad performances by financial institutions or corporations early next year after settling accounts could also bring about negative effects,” said Bae Sang-geun, senior researcher at the Korea Economic Research Institute.

In the stock market, the demand and supply system has collapsed since it is hard to find investors to balance out the net selling of foreign investors. With the prospect of a trade deficit next year, the won could remain weak against the dollar for a long period. In addition, troubled companies could finally go under in droves.

Yang Kyung-sik at Hana Daetoo Securities said, “With restructuring at a high gear, a number of companies will close. Since it is very difficult to predict which ones will collapse, the financial market is also likely to suffer great confusion.”

jarrett@donga.com sanjuck@donga.com