[Viewpoint]Government action needed nowThe credit crunch and instability in the financial market seem no closer to ending. Following the revelation of liquidity problems at Citigroup, the world’s largest bank, the global financial market is once again in turmoil.
Despite the government’s liquidity provisions and President Lee Myung-bak’s repeated calls to banks to cut rates, the credit crunch continues.
In order to understand the situation accurately, we need to assess the vicious cycle between the current global financial crisis and the economic slowdown.
First, major financial firms including hedge funds are still trying to reduce their debt, and fluctuation in the financial market will continue for some time.
Investment banks and hedge funds still have trillions of dollars in assets linked to worthless mortgage-backed securities.
The flow of foreign currency out of emerging markets is accelerating. This year alone, foreign investors pulled more than $30.5 billion (46 trillion won) out of the Korean market, and Korea is not alone.
In order to secure liquidity, investors are retrieving their money from financial markets around the world.
Second, uncertainties that began in investment banks have spread to the real economy.
Now, they are reaching commercial banks. The lack of available credit is particularly serious for the credit card industry and automakers.
Some major banks are reaching the maximum allowable levels of bad debt for every quarter, but we cannot rule out the possibility that a second and third Citibank will need bailing out if the economic slowdown continues.
The U.S. government has a $700 billion bailout plan to help the financial industry. The situation is clearly desperate, but it is questionable if the money is enough to resolve the problem.
The depression in the real economy has just begun, and uncertainty in the financial industry is dealing a deadly blow to the global market.
The current financial and real economy crises are different from those of 11 years ago.
Back then, the financial crisis was a problem for Korea and Asia, but the current situation is a global problem.
This makes it more difficult to find a solution. Debt workout programs for small businesses, shipbuilders and construction companies are being executed in Korea.
No domestic banks have gone under yet, but in the long term, they will likely face trouble.
Adopting the Bank of International Settlements capital adequacy ratio, or BIS ratio, has been delayed for about a year, but no financial company will accurately represent their nonperforming assets to lower their capital adequacy ratio.
If a financial company voluntarily restructures after its capital adequacy ratio falls below 8 percent, the government will be exempted from its responsibility.
The issue is that the burden on state finances will be lighter the faster the government acts.
It is time for the government to take matters into its own hands, based on the basic principles of restructuring.
Disregarding the idea that restructuring a financial institution is only possible when its BIS ratio has fallen below the standard, the government must take decisive pre-emptive measures.
For these measures to be effective, enough funds must be secured.
Furthermore, bank and government officials in charge of restructuring should be given ample authority and indisputable immunity.
It is a good precedent that the United States has granted immunity to Treasury officials for their actions in executing the recent bailout plans. Korea’s governing and opposition parties must agree to take similar steps.
While the United States’ reluctant initial steps fueled the economic crisis, Europe’s decisive and sufficient measures were effective.
The government should take a lesson from these two varying approaches.
*The writer is a professor of business administration at Soongsil University. Translation by the JoongAng Daily staff.
by Jang Beom-shik