[Viewpoint]Help from withinThe impact of the financial crisis in New York only gets more powerful instead of subsiding over time. With its aftermath beginning to affect the overall economy, both financial and real markets are filled with apprehension.
The suffering would be easier to bear if the slump in the real economy came after the financial crisis was relatively settled, but this is only wishful thinking. With financial instability still hovering, the real economic slump is closing in fast. This is like adding insult to injury.
Furthermore, the crunch in the real economy creates a vicious cycle that amplifies financial uncertainty. Corporate insolvency hurts lenders, and then the struggling financial sector can’t make loans, which leads to more corporate insolvency. How should we break this vicious cycle?
President Lee Myung-bak is urging banks to lend money at cheap rates and large volumes, but the banks are not responding. At a time they are busy keeping themselves alive, they can hardly afford to heed Lee’s demand.
Unless the president guarantees the survival of these banks, his words are not enough to resolve the liquidity crunch. We will have to identify bad companies and go through painful restructuring before being infused with new economic life.
While a pre-emptive response is being discussed in the financial sector, it is not that easy. As long as a company or a bank is still alive and has a chance of survival, it will not voluntarily go for restructuring. While receiving public funds in advance could surely save a company from the crisis, it comes with harsh conditions that companies and banks that seem to be intact so far are not likely to embrace.
However, when the crisis worsens and companies become desperate, they have no choice but to accept the government’s helping hand and submit to restructuring. And that time is fast approaching.
Korean companies and banks are responsible for the insolvency and consequent restructuring. We have to endure this no matter what. However, the Korean stock market and currency exchange market are suffering unfairly because of the global financial crisis. In fact, the origin of the crisis is troubled U.S. financial institutions.
The delinquency of subprime mortgage derivative products led to a series of bankruptcies of American financial companies, and the crisis resulted in a worldwide credit crunch. Investors competed to cash out their assets. The Korean stock market was no exception, and the stock index plummeted as foreign investors sold their shares.
And the damage did not stop there. As the investors exchanged the cash from the stock sales to U.S. dollars, the won-dollar exchange rate skyrocketed. The ebbing tides of foreign investment is sucking vitality out of the stock market and sending the currency market into shock.
After being beaten by successive punches, both the stock market and the exchange market are very groggy. The effect of the currency swap agreement with the United States did not last long. Outside of shutting down the currency and capital markets, there is no structural way to prevent stock price drops and a soaring exchange rate.
However, we cannot just continue being hopelessly beaten. There is a way out of this crisis. In the long run, we need to decrease the share foreign investors hold in the domestic stock market. Korean institutions should purchase the stocks they sell instead of other foreigners.
Domestic institutional investors such as pension funds have to play this role. While their participation has been derided as bolstering stock prices and taking the bullets of foreign sales, institutional investors’ stock purchases should be seen in terms of long-term national interest. We need to prevent the Korean stock and currency markets from again becoming a playground for foreign capital.
Some are concerned about increasing the risky stock portion of pension and public funds’ investment portfolios as citizens depend on the funds after retirement. However, institutional investors are known to hold stocks for a long time, and their participation will serve as a safety barrier for the stock market. If institutions own massive shares, the fruits of growth will remain entirely intact in Korea when the economy recovers. Unless the nation’s economy collapses entirely, a stock market supported by institutional investors will never fail.
The writer is an editorial writer of the JoongAng Ilbo.
By Kim Jong-soo