By Kim Da-ye
The storm that started three years ago apparently hasn’t passed.
The financial world seemed to have become a safer place after U.S. investment bank Lehman Brothers filed for bankruptcy on Sept. 15, 2008, but hidden wounds have emerged as governments of troubled countries have run out of remedies.
On Wednesday, Korean shares fell 63.77 points or 3.52 percent to 1,749.16 as fears about Greece defaulting on its debt intensified.
Hyundai Securities Economist Lee Sang-jae suggested in a report three scenarios that could led to a second financial crisis: a default by Greece; a bailout request by Spain or Italy; and the bankruptcy of French banks.
“If any of them materialize, a second Lehman Brothers style crisis would be unavoidable, and its impact would be a long-lasting shock,” Lee said.
Rumors on a default by Greece are spreading fast although European leaders, most notably German Chancellor Angela Merkel, are trying hard to quash them.
Various media reports said that Netherlands’ finance ministry considers a default unavoidable, while Germany’s economics minister has discussed an “orderly insolvency” for Greece.
Local economists and analysts have also begun releasing reports on worst case scenarios.
Jun Min-gyu, an economist at Korea Investment & Securities, said Wednesday that it is now necessary to review the possibility of a Greek default and its impacts, while stressing that there has been no default of a developed country and it is difficult to predict the impact.
According to Jun’s worst case scenario, Greece will return to its pre-euro currency, the drachma, and convert the existing debts into drachma, causing its value to crash.
Greek banks that have a large amount of government bonds could become insolvent, affecting financial institutions of other European countries.
On the other hand, issuers of credit default swaps for Greece’s bonds ― insurance against default ― could become insolvent, Jun said, making an additional warning on American money market funds that made a considerable amount of short-term loans to European banks.
Experts also say that the unrest from the sovereign debt crisis is spreading to the private sector.
Kim Soo-young, an analyst of KB Investment & Securities, highlighted fears of a downgrade of French banks’ credit ratings.
Kim quoted the results of stress tests on European banks released in July that stated French banks’ exposure to bonds issued by PIIGS (Portugal, Italy, Ireland, Greece and Spain) and the exposure to French bonds were 11.3 percent and 43.9 percent of their total, respectively, as of December last year.
“As the fear of a downgrade of France’s credit rating spreads, stocks of major French banks with much exposure are falling,” Kim said.
While developed economies are facing a vicious cycle of slump, government spending, burdensome debt and default risks, the Korean economy remained relatively strong with the total government debt standing 33.5 percent of GDP at the end of the 2010.
The government and many financial experts say that Korea’s ability to withstand external blows has improved.
According to Bank of Korea data quoted by Jun, foreign exchange reserves increased from $239.7 billion in September 2008 to $304.5 billion in June this year while the portion of overseas borrowing against GDP dropped to 35.2 percent from 37.3 percent
The portion of short-term overseas debt also fell from 51.9 percent to 37.6 percent, the data showed.
The stock market, however, remains vulnerable as it is easily affected by foreign investors.
Korean shares owned by foreigners now amount to 31 percent of the total market cap ― up from 28 percent three years ago.
Foreigners’ withdrawal hit the equity market hard this time as well ― for instance, the Seoul bourse lost more than 3.5 percent as they net-sold shares worth 690.6 billion won. Individuals bought stocks worth 456.7 billion won, compared to institutional investors’ 77.1 billion won.
Smarter individuals who learned from the past and stronger institutional investors are, to a degree, sustaining the stock market, but cannot replace foreigners’ presence.