Fundamentals FirstYesterday the Korea Composite Stock Price Index, or Kospi, plummeted briefly to below 490. In response, the government has hurriedly put forth a stabilization measure. For listed companies the purchase of their own stocks has been made easier and for insurance companies the ceiling for equity investment has been greatly raised. Besides, the government will buy corporate bonds of Daewoo affiliates held by investment trust companies for 1 trillion won ($882 million). Furthermore, pensions and funds will be allowed to invest in stocks earlier than originally planned.
Compared to the stock stabilization measure issued in December 1989, which entailed forcing investment trust companies to buy stocks by means of the government''s rights to issue notes, this move is evaluated as an advance in that it opens the "path" for institutional investors, thus expanding the demand base for paralyzed stock investments. It appears that the current stock market has lost the spontaneity for a rebound. In this respect, we believe the governmental intervention is essential.
Nevertheless, the government measure seems to be geared for short-term, extremely limited effects. The fundamental factor for the market collapse is due to spreading anxiety among investors, which has originated from concerns over the overall breakdown of the financial system with the insolvency of companies and financial institutions being reproduced on a progressively larger scale. Investors doubt whether the fundamentals are as sound as the government claims and they worry that the economy might make a crash landing.
There have been also external bad factors: high oil prices, the nosedive of semiconductor prices and the drastic fall in the American stock market. Money has fled the direct financial market and does not move. In such a situation, insurance firms and listed companies will not jump at the opportunity of investment however wide the government opens the path, and the policy effect is bound to be limited.
Rather than a stopgap policy, the government should strive to dispel concerns over the financial system by stepping up restructuring to sever the vicious cycle between nonperforming companies and financial institutions. The government must remember that investors are liable to lose confidence if desperate measures are proffered one after another in urgent situations.
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