Kospi weakens as Italy downgraded

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Kospi weakens as Italy downgraded

The market continued its bear rally falling below the 1,600 level after news that Moody’s slashed Italy’s credit rating citing deepening woes in the euro zone.

However, the news on Italy’s downgrade did not impact the Seoul bourse as severely as expected.

The drop was nearly half of the 63.46 points the market lost on Tuesday, thanks to retail investors’ massive buying which countered the off-loading of foreign and institutional investors.

The market opened on a positive note thanks to the mild overnight upswing in New York with the Dow Jones Industrial Average closing at 1.44 percent higher from the previous trade on Tuesday.

The Seoul market quickly froze after an hour and then headed in the opposite direction, falling as much as 43 points on the news that Moody’s downgraded Italy’s credit rating three notches from Aa2 to A2.

The credit rating agency said in a statement that the decision to lower the credit rating reflects the ongoing economic and financial risks in Italy as well as Europe.

“The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt market,” Moody’s said in a statement.

It added that the credit rating could be lowered further if the liquidity problem is not resolved.

Like Greece, Italy is one of the European countries suffering from mounting fiscal debt. Their debt amounts to 120 percent of their gross domestic product.

However, analysts say the impact that Italy may have could be much larger than Greece’s considering the size of the Italian economy.

The benchmark Kospi closed 2.33 percent lower than the previous trade after falling 39.67 points to close at 1,666.52.

This was the third time this year that the Kospi closed below 1,700.

The first was on Sept. 23 when the market plunged 103.11 points, or nearly 6 percent. The last time the market fell to the 1,600 level was on July 8, 2010.

Although the market declined, it was much milder than Aug. 5 when the stock market plummeted more than 74 points, nearly 4 percent, as Standard and Poor’s lowered the triple A credit ratings of the U.S. for the first time, citing long-term debt growth and the debt ceiling debacle.

Market analysts say the fall was cushioned as Moody’s decision was expected.

“The action taken by Moody’s on Italy has already been reflected in the market and therefore its impact was limited,” said Chae Hyun-ki, an economist at Daishin Securities.

In fact, on Sept. 17 Moody’s announced that it was finishing up a review that would possibly lower Italy’s credit rating.

Additionally, two days after the announcement Standard and Poor’s downgraded Italy’s credit rating from A+ to A.

Some analysts say that Moody’s finally adjusted Italy’s rating to what it should have been.

Analysts were cautiously optimistic that the downgrade would improve the debt crisis as European leaders would likely come up with a more aggressive and detailed plan.

Also, if European banks quickly increase their capital holdings it might lower the risk of a Greek default.

“The Korean stock market has already reflected the possibility of a global recession and financial crisis and as a result will likely stay between 1,650 and 1,900,” said Jun Ji-won, a strategist at Kiwoom Securities.

“The only problem is, as the uncertainties of major government policies still remains, the global financial market will not be stabilized for some time.”

The won, which has been weakening and edging close to 1,200 won against the U.S. dollar, mildly turned around and strengthened, up 3.60 won to close at 1,190.40 won.

By Lee Ho-jeong [ojlee82@joongang.co.kr]

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