Second Financial Crisis

New Economic Team Should Act on Long Prospects

In December, a ranking finance ministry official declared the end of the ``currency crisis,'' but had to withdraw his remark immediately. Market rumors abounded that the official got a scolding ``from above,'' not for his rashness but for his inadvertent admission of the crisis, which the government had not acknowledged, at least publicly.

The government might have thought it shameful Asia's fourth largest economy had to bear the brunt of global financial turmoil even when its far smaller competitors were at relative ease. So the official's behavior reflected Seoul's relief about the hard-won stabilization of local currency, after using up nearly one third of the country's foreign reserves and a series of currency swapping accords with major partners. Still, the Korean won was the worst performing currency in Asia last year.

This reaffirms the simple truth that it is better to face ― and acknowledge ― any problem as it is than to pretend it doesn't exist, even for the purpose of calming excessive jitters, to fundamentally solve the problem and prevent its recurrence.

And there are visible signs of a second financial crisis both here and abroad. According to the International Monetary Fund (IMF), the hardly-awakening real economy is now striking back at the struggling financial sector resulting in much-dreaded vicious cycles in many countries. Major U.S. commercial banks are barely surviving with bailout funds amid the rock-bottom house prices.

The situation here is even more serious. The Korea Development Institute says the foreign exchange liquidity problem ― the shortage of dollars in other words ― could re-emerge soon in the domestic financial market. Despite various bailout programs, corporate losses are rising and household incomes are falling, leading to a protracted business slump, the government think tank said in its monthly report.

Moreover, unlike other Asian economies, Korea has a dangerously high amount of household debt, which could develop into a serious problem at its banks, amid soaring unemployment and plunging family income. The recent rise in the overdue payment rate among credit card holders, the first such increase since the ``credit card fiasco'' of 2003, is only the beginning.

There is an unmistakable difference between now and then, though. Six years ago, the problem resulted from excessive private consumption, encouraged by the government's policy to spend its way out of a crisis. These days, people use cards mainly for advancing cash to pay interest on bank loans and make other cash payments. One more big difference comes from abroad. In what global economists lament as ``financial nationalism,'' major governments have put strings on their bailout funds that they are lent to domestic ― not foreign _ borrowers, as countries don't want their taxpayer money to be spent rescuing foreign companies. This undoubtedly will have a serious impact on emerging countries, particularly Korea, which heavily rely on overseas financial markets to roll over maturing debts and raise fresh loans.

It is against this backdrop President Lee Myung-bak's second economic team, led by new Finance Minister Yoon Jeung-hyun, takes office. Yoon, who was the assistant finance minister for financial policy during the 1997-98 Asian currency crisis, needs to prove he can rise above the opposition's attack on him as being one of the main culprits of the financial crisis 11 years ago.

What he should do in the short run will be rather simple: securing as many dollars as possible by improving the current-account balance through increased exports, maintaining or expanding currency swaps and diversifying foreign funding sources. But the new economic team should reconsider the government's longer-term policy tasks, including the just-legislated Capital Market Integration Act, which calls for drastic industrial deregulation, which has in most part led to the current chaos.

If it ignores the industrial lessons from other countries, the incumbent administration will be remembered as sowing the seeds of long-term disaster just to see brief benefits.