By Cho Jin-seo
Staff reporter
The era of deleveraging may be approaching the financial markets in Korea as well as the rest of the world. The worries of a "double-dip" recession may be exaggerated but it is naive to believe that the market will go back to business as usual, economists and market watchers say.
The ongoing national debt crisis in Europe is discouraging investors from putting their money in equities, and the Korean stock market is one of the clear victims of the global phenomenon of deleveraging, with the KOSPI losing around 200 points over the past month.
The question is where the global investors are parking their money now. In these highly volatile and unpredictable market conditions, they are more interested in safer asset classes ― the dollar, the yen and gold.
"When people prefer safe assets, the yen's value tends to go up along with the dollar and the Swiss franc," a foreign exchange trader in Seoul. "Gold also goes up. Gold is not a commodity anymore. It is a currency."
The price of gold had risen to $1,200 per ounce as of Monday on the New York Mercantile Exchange, on the back of European worries and the escalating military tension between the two Koreas.
But some analysts worry that even gold cannot be a safe haven if the trend of deleveraging in the financial market strengthens.
"There was a brief decline in the price last week. This raises suspicions that the situation is so bad in the financial market that liquidity is waning even in the most safe asset class," said Park So-youn, an analyst at Korea Investment & Securities.
She explains that during the crisis of Lehman brothers in 2008, the global "deleveraging" from all asset classes, except the dollar, pulled down gold from $1,000 per ounce to $712 per ounce, a 30-percent fall.
In Korea, the deleveraging has taken on a more usual form. While foreign investors sold shares massively, they instead bought fixed-income bonds. Even on Tuesday, when the KOSPI lost over 2.7 percent on bad news from north of the border, South Korean government bond prices went up, pushing down their yield. Some think this is a positive sign that foreign investors are not giving up on the Korean economy.
But a more fundamental problem that is sweeping the global market is the woes around the South European debts. "It is not North Korea. It is Europe," said Hwang Keum-dan, an analyst at Samsung Securities. The nationalization of a local bank by the Spanish government, Hwang says, is a sign that the credit risk in Europe has evolved into a collapse of financial institutions.
Under the nationalization scheme, the Spanish government is merging CajaSur and three other savings bank to create a bank with assets of 135 billion euros. And analysts worry that this is just the beginning of a further crisis that may spread all over Europe and probably to other continents as well.
So far, the Korean government has nonchalantly rejected the possibility of a crisis spill-over. On Wednesday, finance minister Yoon repeated his repertoire that the economy is strong enough to weather the European storm, and the central and commercial banks have enough dollar reserve to cope with a possible foreign exchange turbulence.
The government is actually believed to have been involved in stabilizing the won's price on Tuesday's volatile market. But the problem is, economists say, it had said the same when the previous crisis broke out.