The storm is gatheringThe escalating turmoil in the euro zone is taking a toll on markets across the globe. U.S. and European equities crashed and local share prices also retreated under the 1,800 mark. Capital is on a mass migration toward safer havens. Investment funds are flocking to safe assets like U.S. or German government bonds, sending their prices to all-time highs. The German two-year debt yields declined to zero, underscoring that investors’ sentiment has reached a fever pitch.
The panic began to spread beyond financial markets. Recent U.S. unemployment data renewed concerns of a double dip recession or a prolonged slump in the economy. China and other emerging economies that helped to buffer the damage in the global financial crisis in 2008 are unable to play that role this time. The three pillars of the world economy - U.S., Europe, and China - are shaking at the same time.
What is more unsettling is the vacuum of leadership on the global front. World leaders were fast and resolute in their concerted efforts to fight the crisis back in 2008. They now know better and what to do. Nevertheless, they have been slow to act. European leaders are still wrangling over launching euro bonds, joint borrowing led by AAA-rated countries like Germany, to offer relief to troubled neighbors. Their indecision has deepened difficulties in the critical zones - Greece and Spain - and raised alarming bells around the world.
We also have a lot to worry about, including capital flight. European funds invested in local equities and bonds total 460 trillion won. If they pack up to deal with a liquidity crisis back home, local shares and the currency will take a heavy beating. Share prices and the value of the won nearly halved when 45 trillion won worth of foreign capital took flight in 2008.
The country’s exports fell 14 percent in 2009 as a result of the global financial crisis. But demand in China and other emerging economies quickly compensated for the losses. We have less to be hopeful about this time around due to signs of shakiness on the Chinese front. External risks could trigger domestic ones. Household debt totals as much as 922 trillion won, accounting for 80 percent of gross domestic product and exceeding the OECD average of 65 percent. The storm is gathering, but we see no pre-emptive actions from authorities. The government and politicians should set election interests aside to join forces and come up with concrete strategies to fight an impending economic crisis. We have combated them before and we can do so again.