Korea Still Vulnerable to Global Credit Crunch
By Lee Hyo-sik
Staff Reporter
The central bank has warned that South Korea will likely be hit hard by an acute shortage of dollars again if the global credit crunch reocurrs, with local lenders still depending heavily on wholesale sources of financing.
It pointed out that one year after the global financial crisis triggered by the Lehman Brothers bankruptcy, the foreign exchange and other financial markets here have stabilized. But domestic lenders' ability to cope with another financial market debacle remains weak.
In a publication titled ``Financial Stability Report,'' the central bank said with lingering financial sector uncertainties, local banks are not adequately prepared to cope with another massive dollar outflow, adding that it is possible for Asia's fourth-largest economy to suffer a foreign exchange crisis again.
The Bank of Korea (BOK) issues the report twice a year after its monetary policy committee approves it. But, this time, before committee approval, the bank submitted the tentative report to the strategy and finance committee at the National Assembly.
``The United States and most other advanced economies continue to grapple with the stagnant job market and surging mortgage and credit card default rates, with many Eastern European countries grappling with a liquidity shortfall. These and other downside risks facing the global financial market could reignite another round of the worldwide credit crisis,'' the central bank said.
But domestic banks are largely unprepared to counter the possible dollar shortage, it said. ``Lenders here have extended most of their dollar holdings to businesses, while holding a small fraction as reserves. It means they cannot retrieve loans promptly when they need dollars. Like in late 2008, if foreign lenders demand local banks pay back loans rather than roll them over, financial firms could face a severe liquidity shortage,'' the report said, adding, in that case, the BOK will again have to inject part of its currency reserves into the banking sector.
Despite the easing of the global financial turmoil and better-than-expected economic growth here, Korea continues to remain vulnerable to outside shocks due to the financial firms' large borrowing of overseas short-term loans.
The central bank said the nation's foreign liabilities increased by $11 billion to $380.12 billion as of the end of June from three months earlier, with short-term debts accounting for 38.7 percent.