Downward Pressure

Subprime Fallout to Weigh Down Global Economy

The global economy is forecast to grow at a slower rate, affected by the fallout of the U.S. subprime mortgage turbulence. The U.S. and other major economies are bearing the brunt of the global credit woes, which now appear to be stabilizing after reaching its peak last month. No one knows if the credit turmoil will revisit financial markets around the world again. It is still hard to measure the value of equities and other assets related to subprime mortgages.

Rodrigo de Rato, managing director of the International Monetary Fund (IMF), said Friday that he expected a scaling-back of world growth estimates for 2007 and 2008 due to the credit turmoil. ``Fallout from the financial market problems, sparked by a rash of foreclosures in the U.S. subprime market, will result in downward projections for economic growth, particularly in the United States, but also possibly in the euro area and Japan,'' he said. Rato's prediction is a clear warning against the subprime debacle which might hit the global financial markets much harder later this year and early next year.

On Wednesday, the Organization for Economic Cooperation and Development (OECD) lowered its global economic forecasts, citing the impact of the U.S. housing crisis and related financial market instability. It predicted the combined Group of Seven (G-7) economies to grow by 2.2 percent this year, compared with a previous forecast of 2.3 percent. The OECD also revised the U.S. growth projection down to 1.9 percent from 2.1 percent.

In South Korea, the seriousness of the subprime woes had been underestimated until the Seoul stock exchange tumbled in mid-August. The country is now regaining stability. But market players are still uneasy about contagion effects of the rapidly spreading credit crisis. We must pay heed to Rato's warning in order to take timely steps to minimize the impact of subprime developments. The Korean economy is highly dependent on foreign trade. Thus, the downward revisions of world growth will certainly have a negative effect on the nation's exports, which are the driving force behind its economic prosperity.

Against this backdrop, the Bank of Korea (BOK) froze the inter-bank call rate at 5 percent Friday. The rate freeze came after the central bank raised the target rate by 0.25 percentage points both in July and August. Some critics slammed the BOK for hiking the rate for two months in a row, without adequately assessing the external risks from the subprime mortgage crisis.

There is heated debate over the proper level of interest rates. Businesses and investors call for a rate cut to maintain growth momentum. But, the country is still undergoing excess liquidity that has prompted speculation in the property and stock market. Thus, policymakers will have to take a flexible approach to swiftly tackle the global credit turbulence to make sure of stable economic growth. They also must get rid of uncertainties on the market and the economy, encourage investment and push for further deregulation.