The approaching storm

There’s a sinking feeling that the nightmare scenario we fear on the economic front may actually materialize. If worst comes to worst, Europe’s fiscal and monetary woes may prove contagious, culminating in a broad crisis tantamount to the financial meltdown of late 2008.

Even the slightest delay by European countries in fixing their fiscal debt problems could trigger chaos among financial institutions, which would lead to a credit squeeze around the globe and deepen the economic slump.

Spain, which many observers considered a yardstick for forecasting the potential hazard of the European crisis, embarked on a sweeping restructuring of its ailing financial industry.

Removing the cancerous tumor before it spreads is the right way to approach the situation, but many people fear that once the industry is torn open and dissected, we may discover more serious problems and complexities than initially expected.

The exposure could spur market panic and a capital run that would serve as a deadly blow to cross-border financial lenders in Europe. The sovereign debt crisis in Europe would then spread and create a major financial meltdown across the globe.

We have warned numerous times that Europe’s debt situation may spread, and we have called upon authorities to brace the nation for potential risks.

Now that the crisis is growing, we must do more than simply create contingency plans. We must take immediate actions.

The stock and currency markets have already been hammered by concerns over the European credit crisis and escalating tension between the two Koreas over the Cheonan sinking.

Foreign investors sold off their equity holdings here, sending local stock prices down and cause the won’s value to nose-dive.

The local currency lost even more than the euro, once again demonstrating the vulnerabilities of the won to external shocks.

The government and financial authorities must act to stabilize the currency market and prepare for greater risks. They should also closely monitor the flow of foreign capital and keep tabs on foreign debt portfolios and the liquidity of local financial markets.

At the same time, they must ready a safety mechanism to stave off further repercussions in the financial market.

On the international level, they should actively join international efforts via the G-20 platform to prevent the spread and worsening of the European crisis.

We have learned many lessons in the past. We must not wait until the crisis reaches our shores.