Preventing aftershocks from US downgrade

S&P has downgraded the U.S. credit rating from the highest "AAA" to "AA+," the first since the global credit ratings agency`s foundation in 1941. The move came as the U.S. failed to take sufficient measures to cut its fiscal deficit despite an agreement between Republicans and Democrats on raising the debt ceiling. As it did in giving other countries credit downgrades in the past, S&P cite worsening fiscal conditions as the reason.

The shocking news was delivered after trading at financial markets ended Friday. So how financial markets in Asia, which open Monday, will be affected is attracting big attention. The Korean benchmark stock index KOSPI fell more than 10 percent from Tuesday to Friday last week due to fears of a double-dip recession in the U.S. economy and a fiscal crisis in Europe. The steep fall caused many experts to predict a rebound in the domestic stock market. The downgrade of America’s credit rating, however, has dashed their expectations.

Korea should be prepared for the U.S. downgrade causing confusion in the global economic order. Some say the move is a prelude to the collapse of the dollar. When the world was hit by the global financial crisis in 2008, countries coped by injecting government funds into the market. With major economies including the U.S., European countries and Japan suffering from fiscal instability, however, additional injection of public funds is not an option. This is a serious external shock to the Korean economy. Korea is particularly vulnerable to external factors given its dependence on foreign trade for 82 percent of GDP. Slowdowns in major economies will deal a blow to Korean exports, leading to declines in economic growth, corporate profits and individual incomes. In this sense, the Korean government must devise measures to minimize the adverse effects of the U.S. downgrade on the real economy.

Government officials in Seoul held an emergency meeting Sunday amid the worst crisis since the 2008 global economic crisis. The Bank of Korea should refrain from raising the key interest rate for the time being. Fighting inflation is important, but breaking the external and internal economic balance by sticking to this is undesirable. By taking advantage of chaos in the financial market, foreign speculative funds can wreak havoc on the Korean financial market. Fortunately, Korea holds more than 300 billion dollars in foreign currency reserves. If speculative capital shows signs of rearing its ugly head, the government needs to control it by using foreign reserves and calming market jitters.

The U.S. government has urged its politicians to be united by stopping political disputes, saying elected leaders coming together is important to strengthen the economy and stabilize fiscal conditions. Korean politicians should also come together when it comes to economic matters in a bipartisan manner. The most recent global crises have originated from fiscal instability. The Korean government, policies and people must be aware of the importance of fiscal soundness.