Specter of 2008 financial crisis looms again

Korean authorities face volatility amid deepening eurozone debt problem


The 2008 financial crisis sparked by the bankruptcy of Lehman Brothers in the U.S. is still fresh in the minds’ of Korean investors and policymakers. Now eerily similar developments are sweeping the country’s financial market as concerns over the debt crisis in Europe deepen.

All financial indicators ― stocks, bonds, the Korean won and the CDS premium ― are pointing to trouble ahead, with jittery investors quick to push panic buttons at the slightest sign of a negative turn in the global markets, particularly the embattled eurozone.

A sense of financial crisis, either based on hard data or hype, could spill over to the real economy, which in turn would prompt investors to opt for sell-offs in a vicious circle. Korean policymakers held meetings on Friday to put a brake on the sliding stock indexes and plunging won, only to see the latter stay within its target of 1,200 won after pouring U.S. dollars into the foreign exchange market.

The spread on credit default swaps for Korea stood at 202 basis points on Friday in New York, higher than that of France, one of the troubled spots in the eurozone, with its major lenders swallowing a painful credit rating cut.

The Korean won has tumbled 99.20 won this month amid worries that the debt crisis in Europe and the stagnant global economy might prompt more foreign investors to liquidate positions in emerging markets including Korea.

Back in September 2008, the Korean won similarly plunged 118.00 won, and the local currency’s recent fall is steep enough to bring back bitter memories for traders, dealers and financial authorities here.

On Sept. 9, right before the Chuseok holiday, the Korean won traded at 1,077.30 won against the U.S. dollar. The won slid to 1,166.00 won on Friday, a drop of 88.70 won in just two weeks.

The daily swing also went as high as 30 won in recent weeks, a level that is higher than the turbulent period that followed the global financial crisis in 2008.

A showdown between the Korean financial authorities and foreign investors is likely to continue, though it remains uncertain how long the costly market intervention could last. On Friday, currency traders said the authorities intervened in the market at least twice to block the won/dollar rate from rising above the 1,200 won level.

“European banks, faced with a credit crunch, are rushing to secure the U.S. dollars amid concerns about the deepening uncertainties in the financial market,” said Jung Yong-taek, economist at KTB Investment & Securities. “Given that more European funds might be pulled out of the Korean market and the preference for the U.S. dollars would continue, the Korean won is likely to see greater volatility in the coming weeks.”

The KOSPI finished at 1,697.44 on Friday, down 103.11 points and below the 1,700 mark for the first time in 14 months. The stock index tumbled 475 points, or 21.9 percent since Aug. 1.

The recent sell-off on the stock market is similar to what happened during the most recent global financial crisis. The Seoul bourse reached a peak of 1,899.57 on May 16, 2008 before taking an extended beating to close at 1,397.42 on Sept. 16, one day after the bankruptcy of Lehman Brothers. Over a period of just four months, the index lost 502 points, or 26.4 percent.

Foreign investors bought a net 1.4 trillion won on the stock market in July this year, but switched position to become a net seller in both August and September, unloading shares worth 4.6 trillion won and 1.8 trillion won, respectively.

By Yang Sung-jin (insight@heraldcorp.com)