Bracing for the worstThe financial woes of Europe are rocking the fragile global financial markets. A report of a run on a nationalized Spanish bank sent stock prices around the world tumbling. Japanese shares lost 3 percent of their value, the U.S. 1.2 percent, and British shares 1.25 percent.
The toll on the Korean market was heavier than that. The benchmark stock price index slumped as much as 3.4 percent below the psychological Maginot Line of 1,800. As the foreign exchange market fluctuated, the Korean won depreciated nearly 1 percent against the U.S. dollar.
Investors’ sentiment was unsettled by fears of a banking meltdown in Greece, its exit from the euro zone and the repercussions on other troubled economies like Spain and Italy. It remains unclear whether Greece will actually leave Europe’s common currency and cause a devastating blow to Spain, Italy and other weak countries in the region.
The government must be fully prepared for any possibilities. In the worst case scenario, Spain and Italy could face sovereign debt defaults. The global economy will then be swept up in a crisis tantamount to the 2008 financial meltdown. The government held an emergency cabinet meeting to examine economic and financial conditions. In the face of such uncertainties, the government should prepare detailed action plans according to various projections.
What is most important is foreign currency liquidity. The local equity and currency market suffer an exodus of foreign capital during times of global financial crisis. Authorities must ensure that the state’s foreign reserves are sufficient. They must watch closely for any signs of a credit crunch to keep external risks from reaching the economy’s weakest point: the high level of consumer debt.
They should also be flexible in economic policy so that domestic and foreign investors’ confidence in the economy remains solid. The government says the current risks won’t dampen economic growth. But the economy has already slowed due to the depressed economies in the euro zone.
Large manufacturers are struggling in fierce competition with their Chinese counterparts in shipping, shipbuilding, steel and petrochemicals. The government must be flexible as well as vigilant. It should not make the problem worse by failing to act in a timely way and appropriately in order to maintain positive numbers in our public finances during the last months of this government’s term.