All eyes on Europe

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All eyes on Europe

With protests against the government’s fiscal austerity programs raging in Greece, even bringing bloodshed, the financial crisis originating from southern Europe may soon spread across the continent. The international credit rating company Standard & Poor’s has already downgraded the credit ratings of Greece, Portugal and Spain, and Moody’s is also planning to downgrade the credit ratings of the three countries soon.

Furthermore, rumors that the government of Spain may request a relief loan have spread quickly, and worries that the United Kingdom is not safe because of its worsening budget deficit are growing in the international financial market.

Against this backdrop, southern Europe’s financial crisis, which showed signs of recovery after the European Union’s decision to rescue Greece, is shaking up the international financial market again.

As we have already indicated on several occasions, the likelihood that the financial crisis in southern Europe will have a direct impact on the Korean economy is relatively small.

But if the economies of the European countries with deteriorating budget deficits were to collapse, Korea would not escape damage.

First of all, when the financial insecurity of southern Europe spreads, the European economy, which is one of the pillars of the world economy, will probably enter a recession again, ultimately hitting the world economy.

In that case, the damage will hamper the Korean economy, which has etched out a path to recovery with the help of its exports.

Second, if European financial companies pull back from their investments in Korean financial markets, our foreign reserves could decrease rapidly.

Just as with the 2008 global financial crisis, foreign investment in Korean stock and securities markets could ebb quickly, and violent foreign exchange rate fluctuations could recur in the market.

Therefore, the government, private companies and financial firms should all brace for the possibility that the financial crisis emanating from southern Europe will radiate throughout the continent.

At the same time, all of the related parties should establish both long- and short-term measures to minimize the financial shock by carefully observing how the financial crisis from southern Europe unfolds over the coming weeks and months.

We especially hope they will do their best to prevent a fatal recurrence of the foreign currency shortage in case the crisis expands to the rest of the world.
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