By Yoon Ja-young
Staff Reporter
The U.S. subprime mortgage crisis will have only a limited impact on the Korean financial market, Vice Finance and Economy Minister Kim Seok-dong said, Monday.
``The global financial market is expected to stabilize step by step, but it is too hasty to conclude that the problem will be wrapped up in a short period of time,'' Kim said in a meeting with regulators, central bankers and economists in Seoul.
Its effect on the Korean market, however, won't be huge, Kim stressed.
He said the subprime problem was not a crisis for the whole financial market, as bonds directly related to it remain at only 1.2 trillion won, and the fundamentals of the global economy are still good.
Investment in U.S. subprime mortgages by Korean financial institutions totals $850 million, which includes $600 million by five local banks and $250 million by nine insurers. Their appraisal loss is estimated at $85 million.
However, the default risk isn't big as 80 percent of the bonds have credit ratings of A-, according to the government. ``Considering net profits of local financial institutions, the loss can be fully absorbed,'' Kim added.
``Local businesses are partly having difficulties in issuing stocks abroad as the global market is avoiding risky assets, but it isn't a serious problem considering our credit ratings and abundant liquidity.''
Local housing mortgages also have little possibility of default as they have been under strict loan-to-value (LTV) ratio regulations, according to Kim.
He said the government is ready to take preemptive measures such as buying up repurchase agreements (RP) or supplying troubled institutions with liquidity if concerns of a credit crunch emerge. Kim said the Ministry of Finance and Economy, the Financial Supervisory Commission and the Bank of Korea will set up a task force to watch the market, and they also plan to strengthen risk management on derivative linked products.
The global financial market turmoil, which was reignited by the French global bank BNP Paribas' freezing of three funds investing in the U.S. subprime mortgages, showed signs of stabilization as central banks around the world infused $300 billion in emergency funds to the money market.
Though European stock markets continued to plunge, the Dow Jones industrial average closed at 13,239.54 on Friday falling only 0.23 percent.
The Asian stock market started the week with a rebound, showing signs of a gradual recovery. Korea's main index KOSPI closed at 1,849.26 Monday, up 20.77 points, or 1.14 percent, from Friday. Samsung Electronics, the country's biggest corporation, rose 1.66 percent, and semiconductor producer Hynix soared 4.56 percent. Steel maker POSCO also rose around 4 percent.
The Nikkei 225 of Japan gained 35.96 points, or 0.21 per cent, to close at 16,800.05, as the Bank of Japan's injection of 60 billion yen ($5 billion) helped ease investors' concerns. The Shanghai Composite Index also ended the morning up 1.74 percent at 4,831.841 points.
The Korea Institute for International Economic Policy (KIEP) said subprime mortgage crisis could be a boon for East Asian countries, which need to subdue their overheated stock markets.