By Kim Jae-kyoung
Staff Reporter
The renewed concerns over the credit crisis in the U.S. financial markets caused by the two crippled U.S. mortgage giants ― Fannie Mae and Freddie Mac ― have rippled through the Korean economy, sending a shudder through the local financial market.
The KOSPI index plunged to a yearly low of 1,489.86 during intra-day trading Wednesday, down 19.47 points from the previous close, on the back of the overnight U.S. stock market plunge. The Dow Jones Industrial Average fell below the 11,000 level.
With the financial market dive coinciding with high inflation and an economic slowdown, there are growing concerns that Korea may be experiencing a credit crisis triggered by a deadly cocktail of asset deflation and rising interest rates.
Market experts say that if the U.S. credit crisis continues, it will exacerbate domestic woes, dealing a fatal blow to the faltering economy and financial market.
They warn that the world's 13th largest economy has become increasingly vulnerable to a credit crisis as a result of banks' aggressive expansion through reckless lending in the midst of rising stagflationary pressure.
``Excessive loan growth is ailing Korea. Rapid loan growth has forced Korean banks into the capital market for funding, which became a source of vulnerability when the credit crisis erupted in 2007 and remains the Achilles heel of the economy today,'' ING Group chief economist Tim Condon told The Korea Times.
``I think excessive loan growth is at the heart of Korea's financial market stresses,'' he added, noting that loans are growing by nearly 16 percent year-on-year, more than twice as fast as nominal GDP growth. Loan growth accelerated to 15.2 percent in May from 15.1 percent in April.
In particular, loans to households and small and medium enterprises (SMEs) are more exposed to default risks. Despite the economic downturn, banks' loans to smaller firms stood at 398.9 trillion won in May, up 28.9 trillion won from December. The overdue rate on such loans increased to 1.3 percent in March from 1 percent in December.
What is most worrisome is household debt ― the individual debt ratio has risen sharply, with household debt outgrowing income. The growth pace of Korea's household debt has been even faster that that of the U.S. Such debts in Korea grew by 210 percent between 2001 and 2006, compared with 190 percent in the U.S.
In particular, mortgages at banks are feared to emerge as the main trigger of another credit crisis. It is highly probable that many of them can go bad once values of assets, such as real estate and stocks, continue to decline amid an upward spiral of interest rates.
``Korean mortgages remain dangerous financing instruments because they are short-term loans without amortizing payments to pay down the principal amount on a gradual basis,'' Seoul Financial Forum Vice Chairman James Rooney said.
``So I call them 'time bombs' that can explode if credit market conditions become tighter when borrowers need to refinance,'' he added. `` That creates unnecessary financial and economic risk to Korean borrowers and the Korean economy.''
According to Real Estate 114, a real estate services provider, prices of apartments in Seoul fell 0.04 percent for the first week of July, continuing a losing streak for the third week in a row.
Stock prices also took a heavy beating, with the KOSPI falling to a yearly low of 1,507.40 on July 16, down about 25 percent from the yearly high of 1,888.88 on May 16.
On the other hand, interest rates on mortgages have jumped by more than 0.25 percentage points since April. Home mortgages reached 229 trillion won in June, up 35.5 percent from 169 trillion won at the end of 2004.
``I think that current debt levels and overdue rates are within a controllable range, and it is too early to say that the economy is entering a phase of asset deflation,'' a ranking Bank of Korea official told The Korea Times, asking not to be named.
``However, if asset values drop by an additional 20 to 30 percent, chances are that the country will face another credit crisis,'' he added.
The government is particularly worried over a deadly combination of rising overdue rates and asset deflation caused by falls in real estate and stock prices, believing that a sharp fall in asset values may result in a massive default on loans secured by those assets.
Andy Xie, an independent economist and former Morgan Stanley chief economist overseeing the Korean economy, said that Korea has become vulnerable to a massive property bubble as a result of growing stagflationary pressure.
``Korea may be experiencing a massive a property bubble funded by debt. A decline of asset values and a rise of the consumer price index (CPI) are a deadly combination,'' he said.
Alarmed at rising credit risks associated with bank loans, the financial watchdog said Tuesday that it will step up its monitoring of bank loans to prevent lenders from enlarging assets recklessly.
It pointed out that local banks' competition to increase assets without proper risks management is likely to pose a risk to their soundness.