Bracing for a default

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Bracing for a default

As the value of the Russian ruble plunges precipitously after the nearly bottomless fall of international oil prices, the risk for Russia facing a default on its loans due to a massive evaporation of revenues from petroleum exports is growing. Despite the Russian central bank’s last-minute decision to lift its benchmark interest rate from the previous 10.5 percent to 17 percent - a whopping 6.5 percentage point increase overnight - that move still fell short of reversing the drastic fall of the ruble. If the danger of default turns into a reality in Russia, it will most likely seriously affect other major oil producers like Venezuela, Brazil and Indonesia, particularly given their weak economic fundamentals and financial infrastructure.

If a global economic slowdown is prolonged, emerging markets, which mostly depend on raw material exports such as crude oil to sustain their fledgling economies, are increasingly susceptible to the risk of foreign exchange crises. A dark cloud blown from oil-producing countries is hitting the already lackluster world economy.

Analysts say that even if Moscow eventually declares a default and its ominous foreign exchange crisis extends to other emerging economies around the globe, it would not have a direct impact on our economy. Korea did not invest in those countries in a big way, and our foreign reserves could obviously withstand the perilous repercussions from Russia and other petroleum exporters.

Yet we cannot rule out a possibility that the international crisis may wreak havoc on our economy, which is struggling with its own woes. As it turns out, stock prices on the Korea Exchange have dropped by an alarming margin due to big foreign players’ continuous selling of their Korean shares since Dec. 10, when the price of international crude oil began to nose-dive. That means our economy is not immune from the realignment of investments by global investors amid the ever-growing risks of default in emerging economies.

The government must carefully watch not only the dramatic fluctuations of the world’s financial markets and crude oil prices, but also an inevitable shift in the global economy. Regardless of some tangible benefits from the plummeting petroleum prices - like a reduction of our own energy costs - the authorities should not ignore the adverse effects on our exports in the middle of a global recession originating from the potentially devastated economies of oil-exporting nations.

At the same time, the government must come up with effective measures to cope with a potential change in the global economy after the realignment of world energy markets.

JoongAng Ilbo, Dec. 18, Page 34

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