Exit of foreign funds dominates summit

Euh Yoon-dae, KB Chairman, left, and Kim Choong-soo, Bank of Korea govenor, discuss policies at the IIF Asia CEO Summit in central Seoul Friday. [NEWSIS]

The impact of the sudden-exit strategy by developed countries from the financial markets of emerging countries was the biggest concern raised during the three-day Institute of International Finance (IIF) Asia CEO Summit held in Seoul last week.

At the annual meeting that ended Friday, KB Financial Group Chairman Euh Yoon-dae raised concerns over the possibility of a liquidity crunch in countries where there is a massive exodus of foreign investments.

During his speech Thursday, Euh said Asian financial companies need to strengthen nonbanking businesses like investment and asset management, adding that it cannot be done in a short time.

Kim Choong-soo, Bank of Korea governor, also attended the meeting. “If interest rates in advanced countries rise due to exit strategies going forward, then losses on holdings of advanced country bonds might be seen,” Kim said. “And as foreign funds that had been flowing in suddenly reverse course, loans could turn sour from a drop in collateral value, and liquidity crunches could hit our market.”

The governor also noted that if the U.S. Federal Reserve, European Central Bank and other central banks around the world withdraw funds in concert, the magnitude of the impact on emerging markets would be devastating.

The governor proposed a dramatic reduction in external funding. “The Asian financial sector must build up its capacity to create safe, globally marketable assets,” Kim said.

The governor suspects a new crisis is brewing in unexpected sectors. “In this regard, it is important to prepare for new, unanticipated crises rather than [dwell] on crises that have already passed if we hope to prevent their recurrence,” he said.

“And because Asia in particular has emerged relatively unscathed from the latest crisis, the likelihood is high for the risk appetite here to come roaring back when the economy recovers in the future.”

Last week, central banks in Korea, Europe and Australia joined the worldwide trend toward monetary easing to boost growth.

However, debates on whether to scale back the stimulus are slowly emerging in the United States as its economy improves. The U.S. stock market advanced to a record level for the third week on companies’ better-than-expected performance reports.

The Dow Jones Industrial Average advanced 144.53 points, or 1 percent, to close the week at 15,118.59. The Standard & Poor’s 500 Index rose 1.2 percent to 1,633.70. Both indexes reached record highs. Furthermore, earlier this month the U.S. Department of Labor that the unemployment rate dropped from 7.6 percent in March to 7.5 percent in April, the lowest since 2008, indicating the U.S. economy may be on the path to slow and steady recovery.

In response, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said he favors curbing the stimulus.

Currently, the U.S. Federal Reserve purchases $85 billion in debt each month. The Fed Chairman Ben S. Bernanke earlier pledged to keep the target interest rate at near zero until the unemployment rate falls below 6.5 percent and inflation exceeds 2.5 percent.

More than 120 representatives from Asian financial sectors, including Timothy Adams, president and chief executive of IIF, and Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group, attended the event hosted by KB Financial Group. About 320 private banks and investment firms from 70 countries are members of the IIF.

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