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The Vengeance of Debt

Posted May. 10, 2010 14:33,   


American poet Robert Frost wrote the famous poem “The Road Not Taken,” which starts with the line, “Two roads diverged in a yellow wood.” He left an epigram worth reflecting on: “No matter how clever a trick debts create, one can hardly overcome it without repaying the loss they incurred.” The book “The Great Reckoning” co-authored by British journalist William Rees-Mogg says everything has a price and all bills must be paid, adding that historically, all attempts not to repay after going into debt end in tears. Be it an individual or a nation, the “vengeance of debt” is inescapable.

The financial crisis originating in Greece is spreading as a global financial uncertainty. Major stock markets in Europe and those in the U.S., Japan and China are struggling amid plunging share prices day after day. The Korean stock market is also suffering, with the benchmark KOSPI tumbling below the 1,700 mark. Foreign investors have sold Korean stocks en masse. Fears are rising that the global financial market and the real economy, which were on the path to recovery from the global financial crisis, could fall into a double dip recession.

The prime factor causing the latest financial crisis is the “vengeance of the debt.” To overcome the 2008 global economic crisis, countries used massive economic stimulus packages that raised fiscal deficits. Fears over fiscal soundness have led to instability in the financial market. European nations, especially those in the southern section of the continent where the latest crisis originated, had massive national debts and fiscal deficits relative to their economic scale due to bloated governments and populist policy.

Korea maintains a relatively sound fiscal balance compared to Europe, the U.S. and Japan, but is in no position to grow smug. The government, provincial and municipal authorities, and political circles must learn lessons from this crisis, and reflect on the importance of sound fiscal management. There is no such thing as a bottomless fountain that produces water ceaselessly, however lavish the use of water is. With external uncertainty growing anew, authorities must exercise more caution over raising the benchmark interest rate. Raising the rate at this point will fuel jitters in the domestic financial market and could deal a fatal blow to the real economy.

Editorial Writer Kwon Sun-hwal (shkwon@donga.com)