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Rising Protectionism Deepening Global Recession

Posted March. 04, 2009 07:43,   


Why is the global financial crisis getting more serious instead of being addressed?

Six months have passed since Lehman Brothers went bankrupt, but the crisis is deepening with no light at the end of the tunnel.

Optimism is waning that the global economy will rebound in the second half of this year.

Until the end of last year, experts both at home and abroad predicted that the financial crisis would end in the first half of this year and that the focus would move to the real economy.

Commercial banks, which are larger than investment banks, however, are struggling with lack of liquidity.

A new wave of the crisis emerging from Eastern Europe is causing a ripple effect.

○ Losses mount, skepticism spreads

The United States and major European countries expected the injection of public money into financial institutions to end the crisis. The bailout amounts, however, are dramatically rising.

Though Washington has injected 150 billion dollars to save struggling AIG since September last year, the insurance giant still reported the biggest quarterly loss in world corporate history. The U.S. government announced its fourth round of aid for AIG Monday.

The same pattern is repeating with commercial banks such as Citigroup. Washington first guaranteed bank debts and bought 25 billion dollars in preferred stocks from each bank. With the losses apparently failing to decrease, a drastic measure was taken: the nationalization of banks.

With the crisis spreading despite a massive amount of government injections exceeding expectations, fears are growing that the markets will spiral out of control. This uncertainty was why the Dow in New York fell under 7,000 yesterday, a 12-year low.

With global financial companies recouping their investment from overseas, foreign exchange markets in newly emerging economies including Korea are seeing wild fluctuations.

Financial sector losses are hitting every corner of the world. The recession in the real economy has worsened the financial structure of individuals and companies, leading to poor performance by financial companies.

To break the cycle that leads to a financial crisis, a recession in the real economy and additional losses in finance, a rebound is needed in the real economy. Economic indices in major economies, however, are hitting new lows.

“The bubble of U.S. property prices, the origin of the crisis, has been bursting over the past two and a half years, but we see no end of the tunnel,” said Song Tae-jeong, senior researcher at Woori Financial Group.

“Falling asset prices are eroding even solid assets.”

○ Protectionism spurs common crisis

With the spread of the crisis, international cooperation that had appeared to go smoothly is seeing cracks.

Several European Union member countries oppose a financial rescue package for Eastern Europe, heightening political tension between Eastern and Western Europe.

Developed economies are issuing government bonds to finance their economic stimulus packages, adding more distress to emerging economies reeling from a dollar shortage.

As each country tries to put itself first, experts say this is making the common crisis bigger.

Bae Sang-geun, chief of the economic division of the Federation of Korean Industries, said, “Bad companies are supposed to go bankrupt but the U.S. is instead helping its auto industry that’s on the brink of bankruptcy. Protectionism among major economies has also spurred the spread of the crisis.”

jarrett@donga.com baltika7@donga.com