Failed bailout in Cyprus weighs on stock market

The Korean stock market reacted yesterday more strongly to an aborted bailout plan for Cyprus than to risks from North Korea.

The Kospi opened 0.8 percent lower yesterday, finishing at 1959.41, a retreat of 0.97 percent or 19.15 points, as foreign funds continued to reduce their holdings.

The government said the Cyprus situation is a reminder the euro zone crisis isn’t over yet.

“Although Cyprus accounts for 0.2 percent of the combined GDP of euro zone countries, it has had an impact on the local market,” said Kim Seong-wook, a director at the foreign exchange market division at the Ministry of Strategy and Finance. “The euro zone crisis isn’t over, and we have to keep monitoring the continent.”

Kim emphasized it has become hard to predict how the local stock market and currency will move due to persisting uncertainties in overseas markets. According to the official, it was possible to forecast the Korean won would fall against the U.S. dollar until before last year, if the U.S. stock market buoyed.

“It has become a daily job to monitor what is happening in Europe and the U.S. due to volatility in the local market,” said Eun Sung-soo, director general of the international finance bureau of the finance ministry. “Recently, volatility has been the main target of close monitoring as capital movement has become very active because of various external factors.”

Compared to Feb. 13, when North Korea conducted its third nuclear test, the Kospi reacted more negatively to the Cyprus bailout.

The North’s nuclear test had a minimal impact on the South Korean stock market, according to the government. The Kospi retreated 5.11 points on that day.

Even on March 11, when the North Korean regime threatened the South that it will make an attack in response to the joint military drill Key Resolve between South Korea and the United States, the Kospi dropped only 2.66 points.

The aborted bail plan for Cyprus caused the local currency to fall 4.5 won against the U.S. greenback. Treasury bonds also declined as investors shunned emerging-market assets.

The euro fell toward the lowest in almost four months against the dollar and weakened for a fourth day versus the yen after an official said European policy makers in Cyprus discussed further capital controls and the extension of a bank holiday through to the end of the week.

The situation in Cyprus is the “next chapter” to the Europe, HSBC Holdings Plc chief economist Stephen King said yesterday.

A crisis that has rocked the global economy and financial system in recent years may have entered its final stage, Bank of Korea Governor Kim Choong-soo said at a meeting with economists in Seoul yesterday. Kim, who didn’t mention Cyprus, said the Bank of Korea will consider domestic growth and inflation and global conditions for trade when setting monetary policy. The authority kept benchmark borrowing costs unchanged at 2.75 percent at its March 14 review.

By Song Su-hyun, Bloomberg [ssh@joongang.co.kr]