By Kim Tong-hyung
Europe’s financial crisis has taken a turn for the worse and Korea seems to be a character in the unraveling Greek tragedy. Market volatility caused by renewed fears over another economic downturn proves that occasional rallies over the past few months were only false dawns.
A freefalling Korea Composite Stock Price Index (KOSPI) and the sliding value of the Korean won are the skid marks left by investors as they run screaming from the country’s export-dependent economy, which is more vulnerable to external factors than neighboring countries like Japan, China and Taiwan.
And with dire predictions emerging of a collapse of the Greek economy, market watchers believe the coming weeks could provide a serious test to the mettle of the Korean financial markets.
The KOSPI closed down for the sixth consecutive day Wednesday, sinking further below the sentimental 1,900 mark to 1,840.53 as concerns mount over worsening global conditions.
This represented a 58.43 point, or 3.08 percent, fall from Tuesday’s line, which was softened by a flurry of late bids from institutional investors who apparently intervened following an early selling binge.
Most alarming is the acceleration of the foreign capital flight. Offshore investors pulled out of the market for the 11th consecutive session, dumping a net 500.4 billion won (about $430 million) worth of shares and a net total of 2,679.3 billion won during the selling stretch. Foreigners unloaded 168.5 billion won worth of shares during Tuesday’s session, indicating that confidence in the Korean economy is eroding quickly.
The value of the won fell to 1,165.7 against the dollar at the end of Wednesday’s session, nearly revisiting its yearly low of 1,166.3.
Shares in Samsung Electronics, the undisputed kingpin of Korea Inc., tumbled 6 percent on rumors that Apple, one of its biggest consumers for semiconductors and flat screens, is moving to further diversify its chip sources for its mobile devices.
This had a massive impact on the overall stock index, which has been piggybacked by a precious few number of blue-chip companies and institutional investors, market observers say.
``The political turmoil in Greece is clearly seen as a massive downside risk. And since the stock market in recent months has essentially been a duopoly led by Samsung Electronics and Hyundai-Kia Automotives, the hit on Samsung Electronics’ share prices threw fuel on the fire,’’ said Song Jae-hak, a senior researcher from Woori Investment and Securities.
It was just weeks ago when it seemed the world had seen the worst of the recent financial turmoil.
The United States was reporting a fall in its unemployment rate and steady improvement in consumer spending. And top Korean policymakers like Strategy and Finance Minister Bahk Jae-wan and Bank of Korea (BOK) Governor Kim Choong-soo were repeatedly issuing confidence that Europe will navigate out of trouble ``one way or another.’’
The events of the past few days has resulted in optimism evaporating faster than rain in the Sahara.
Greece has moved to hold a new an anti-austerity election, after parties failed to agree on a coalition government following an inconclusive poll taken just more than a week ago.
Observers believe that the Greek parties calling for the rejection of the austerity measures, which are the conditions of international efforts to rescue the debt-crippled state, could gain more from the new election to be held sometime next month. A result in their favor may bring an end to the country’s membership of the euro, an outcome that is starting to look inevitable as fears rise over a run on Greek banks.
This could double as an existential crisis for the euro. A Greek bankruptcy and departure from the euro would cost the 17 eurozone countries up to $351 billion, which could be enough to push the region into a crisis reminiscent of the 1930s, according to a recent analysis by German magazine Wirtschafts Woche.
Greece’s departure from the euro may also trigger a massive flight of deposits from other precarious nations like Spain, Portugal and Italy to safer destinations like Germany, Britain and America. Stemming this would require the economies to impose capital controls, but this will virtually kill the euro as a single-currency experiment.
So it appears that the fate of the world economy will hinge on Greek voting booths. Christine Lagarde, head of the International Monetary Fund, has already declared she is ``technically prepared for anything.’’ Wolfgang Schauble, the German finance minister, warned Greek voters that unless they deliver a government that accepts the terms of the bailout, the country will have to leave the euro.
All this drama has Korean market watchers on the edge of their seats. Another perilous chapter in the eurozone debt crisis could be a kick in the teeth for Korean markets, which are already breathing heavily on the ropes.
Korea’s heavy dependence on exports, which account for half of its economy, and the openness of its capital markets make it particularly vulnerable to rough patches in the global economy.
The country needs renewed external risks like a hole in the head. Policymakers are at a loss of how to cope with the depressing combination of high inflation and subduing economic activity, which has some observers wondering whether it’s time to watch for stagflation.
Exports have pulled back sharply in recent months and consumers can’t pick up the slack due to historically high levels of household debt and stagnant income.
``Markets’ confidence in the future of the eurozone continues to erode and the consequences of this could be serious. Should the troubles in Greece spread to countries like Spain, Portugal and Italy, then things will really get out of hand and we may eventually witness the collapse of the eurozone,’’ said Cho Ik-jae, a senior analyst of Hi Investment and Securities.
``Considering that the financial markets in Korea are heavily reliant on the global economy, an exodus of European capital and other foreign investment would rattle the markets severely if Greece really does end up leaving the euro.’’