Bracing for worst case scenario

Europe has again been swept up by credit crises, with a warning that Portugal would need a second bailout to stay afloat. Moody’s Investors Service slashed Portugal’s credit rating by four levels to the junk grade of Ba2. Portugal, which sought a bailout from its European Union peers and the International Monetary Fund in April, has been struggling to cut spending and sustain its ailing financial system.

Moody’s warned that there was a “growing risk that Portugal will require a second round of official financing before it can return to the private market.” It predicted the country won’t likely meet the target to reduce its deficit or become capable of raising funds at sustainable rates in two years time or thereafter. The credit agency more or less discounted the IMF’s prescription to debt-ridden countries that are given loan agreements to straighten out and regain market confidence.

Greece has been the harbinger. Its stringent austerity measures exacerbated economic decline and reduced fiscal revenue, hence its inability to fulfil its debt obligations. The troubled euro-zone countries - Portugal, Italy, Greece, and Spain - are casting dark clouds over global economic prospects. Another euro-zone member, Ireland, is also feared to require a second round of rescue financing to meet its debt obligations. Local securities analysts are down playing repercussions from the euro-zone credit crisis on the Korean market, but we should nevertheless brace for the worst case scenario.

If the euro-zone debt crisis sends chills worldwide, the first to explode on our home turf will be household debt, which has reached dangerous levels of over 800 trillion won ($750 billion). Another global financial crisis like 2008 would send interest rates higher, taking a toll on households laden with debt. That would have consequences for the banking sector.

The Financial Supervisory Commission recently came up with a set of proposals to reduce household debt making it harder to get new loans. Other plans such as encouraging lending at fixed rates and duel principal-interest payments will also help, but they are nevertheless insufficient.

The government, meanwhile, should make pains to keep its fiscal balance at a sustainable level. Politicians eying next year’s elections are coming out with one populist measure after another to win over voters, without any consideration of fiscal responsibility. But we must all remember that the European credit crisis is not a problem on another planet.