The global economy faces greater risks of cyclic downturns as the financial markets have become more interconnected since the demise of Lehman Brothers five years ago, the Bank of Korea chief warned.
In a meeting with commercial bankers on Friday, BOK Gov. Kim Choong-soo said the interconnectedness of markets worldwide had become “stronger” as economies tried to fix the global crisis.
This market development is likely to increase financial risks worldwide, the central bank chief said.
He added that the credit rating of a country used to be graded separately from its commercial banks.
However, as market ties have become closer, bank and sovereign credit standings have come to move in line with one another.
The eurozone has seen the national credit risk of its members evaluated in accordance with that of its financial companies.
Increased regulations governing banks’ liquidity prompted them to purchase state bonds over the last five years, further increasing the interconnectedness of financial markets.
As yields on state bonds, prone to global economic conditions, face increased volatility, institutional investors such as banks have also been exposed to such risks.
Gov. Kim urged domestic commercial bankers to be aware of such market developments and preemptively counter any risks that may adversely affect their operations.
The words of caution come as the global financial markets are poised to react to the U.S. Federal Open Market Committee’s meeting next week, when it is expected to come out with detailed plans for an exit from quantitative easing.
A gradual exit from the unorthodox monetary policy by the U.S. Federal Reserve will increase the risk of an interest rate rise globally as investors unload their fixed-income securities.
Korea has been relatively unscathed due to what the BOK has described as sound fundamentals, and brisk exports.
However, emerging markets such as India and Indonesia recently saw an outflow of capital, weakening their currencies, bonds and stocks.
Gov. Kim said that the central bank maintained a rosy outlook on Korea’s economy, despite negative factors such as U.S. monetary stimulus exit, rising oil prices and the country’s tax revenue shortfall.
Korea is expected to have a tax revenue shortfall of 7 trillion ($6.4 billion) to 8 trillion won this year, down from its initial estimation of 10 trillion won, as the economy heads for recovery in the latter half of this year, Deputy Prime Minister and Finance Minister Hyun Oh-seok told the National Assembly’s Strategy and Finance Committee members on Friday.
By Park Hyong-ki
(hkp@heraldcorp.com)
