Stock turmoilStock markets plunged worldwide last week as turmoil from the U.S. mortgage crisis rippled across the globe. The trouble started with the U.S. subprime mortgage market. Housing prices fell and low credit-quality homeowners were unable to pay back their loans. Some 17 to 18 percent of the subprime loans in the United States is estimated to result in default. Mortgage lenders are filing for bankruptcy and losses in funds that had invested in mortgage bonds are snowballing.
France’s biggest bank, BNP Paribas, have frozen three investment funds amounting to some 1.6 billion euros, citing U.S. subprime mortgage sector problems. Central banks around the world, including those in the United States, Japan and several European countries, have pumped more than $270 billion into financial markets in the past week but the situation is still precarious. Today’s international finance market is so intertwined that trouble in one place means a massive chain reaction. Moreover, the global housing market, including China and India, is facing a bubble as it is. How far the ripples of this crisis will reach and how long it will take to subdue the crisis is as yet undetermined.
The Korean government claims that the U.S. subprime mortgage crisis will have “limited” consequences in the country’s economy. It claims so on the basis that subprime mortgage loans by Korean financial institutes amount to only $250 million. While it is understandable that the government is trying to assuage the public’s fears, it is being too simplistic if it calculates our loss only in terms of direct investments. Our stock prices have plummeted and the earning rates for overseas stock funds worth some 30 trillion won ($30 billion ) have taken a serious fall. The interest rates for the overseas bonds that our government and companies have issued have also gone up as a result of the crisis. Hyundai Motor Group has even have decided to postpone the issuing of its bonds and monitor the market for awhile.
We are in a situation where we must worry about a credit crunch in the international finance market while there is an expansion in domestic liquidity. The government is said to be preparing measures to cope with various possibilities. The only way to minimize the shock is to act boldly and promptly when necessary. Also, we must examine whether there aren’t any problems with the housing loans by savings banks, sales finance companies and lending companies. We shouldn’t have a big fuss over nothing but we shouldn’t also sit around and wait unprepared.