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The Korean won plunged to a 78-month low of 1,328.1 won per dollar, up 59.1 won from the previous close, on deepening global credit woes. This is its weakest level since April 12, 2002 and the biggest daily drop since Aug. 6, 1998. / Korea Times Photo by Lee Ho-jae |
By Kim Jae-kyoung
Staff Reporter
The local currency collapsed again Tuesday, on the back of the overnight crash on the U.S. stock market where the Dow Jones industrial average fell below 10,000 points for the first time since 2004.
Japan's Nikkei 225 fell 3 percent to a five-year low and stocks in other emerging economies also took a heavy beating as investors dumped stocks on fears that the financial malaise created by the U.S. credit crisis is spreading throughout the world.
The credit crisis is quickly turning into a crisis of confidence as local banks and firms are locking up their cash and rushing to the safer greenback, believing that liquidity problems will be aggravated going forward.
The Korean won plunged to a 78-month low of 1,328.1 won per dollar, up 59.1 won from the previous close. This is its weakest level since April 12 2002 and the biggest daily drop since August 6 in 1998. The won has lost more than 29.52 percent or 392 won against the dollar so far this year.
The KOSPI started lower at the opening bell and fell to as low as 1,321.81 in the morning but the benchmark trimmed those losses on rising hopes that coordinated rate cuts around the world are coming. The key index rose 7.35 points, or 0.54 percent, to 1,366.1, while the KOSDAQ lost 4.44 points, or 1.09 percent, to close at 401.95. The KOSPI has fallen 28 percent, or 531.03 points this year.
The deepening market meltdown illustrates how the global credit crisis has sent seismic shocks through the local financial market and economy.
In its latest global financial stability report Tuesday, the International Monetary Fund (IMF) warned that emerging market economies, including Korea, are facing the rising risk of a hard landing or regional financial crunch in line with foreign capital outflow.
``Capital outflows have intensified, leading to tighter international and in some cases internal liquidity conditions. Those with greater reliance on short-term flows or with leveraged banking systems funded internationally are particularly vulnerable,'' it said.
``Against the backdrop of rising emerging market risks, institutional investors have reduced positions, especially in equities,'' it added. ``This has been more pronounced in Asia, with especially heavy outflows from Korea and Thailand.''
ING Group Asia's chief economist Tim Condon echoed the view, saying, ``Korean financial assets have been especially hard hit, which we ascribe to commercial banks' dependence on capital market funding for asset growth.''
Citing the won's recent sharp depreciation as ``a disorderly rise,'' he said, ``The risk of the disorderly rise is that financial stress on issuers of dollar-denominated liabilities depresses economic activity, cascades into the banking system and erodes the health of banks.''
The local economy has started feeling the pain from the global credit crisis as the crash on the local financial market has reduced household wealth significantly, dampening both consumer and business sentiment.
According to the Korea Exchange, individual investors lost more than 100 trillion won on stock markets between January and September both at home and abroad, with market capitalization of shares and funds held by individuals falling by 104.2 trillion won.
Market experts said that Korea needs to take a cautious approach to cope with the current turmoil as it has been triggered mainly by external factors that stemmed from the Wall Street crisis.
``I think Korea should wait a bit to see how the crisis unfolds before acting too hastily,'' Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business, told The Korea Times.
``We need to understand how the U.S. bailout is implemented and with what results, and also see if the European banks hold or if more experience difficulties,'' he added. ``What is crucial right now is not to rush to action and increase moral hazards, such as the idea that the government will do whatever it takes.''
The IMF also stressed that the government should avoid market intervention unless it is an emergency situation.
``Emergency government interventions should be temporary and taxpayer interests be protected. Intervention mechanisms should minimize moral hazard, while recognizing the exigency of the situation and the evident need for public support,'' it said.
A toxic cocktail of global credit tightening, rising domestic interest rates, and a global recession, has raised speculation that coordinated emergency rate cuts by central banks around the globe might be around the corner.
In a recent research note, Andy Xie, an independent economist and former Morgan Stanley analyst, said that the Fed may cut interest rates soon and other central banks will follow suit.
``The pressure on central banks to ease extends to other economies. Government debt levels are too high in Europe and Japan, and tax rates are already too high,'' he said. ``Global coordinated cuts of interest rates may happen soon.''
Now attention is being paid to the Bank of Korea's (BOK) monetary policy meeting slated for tomorrow. Many expect the central bank to freeze interest rates due to high inflation and the volatile currency market.
However, some argue that the central bank should cut rates to reinvigorate the faltering economy. Moody's Economy.com recently recommended that the central bank lower its policy rate in the upcoming meeting, citing a slowdown in consumer inflation and a liquidity shortage.
kjk@koreatimes.co.kr
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