Korean shares are coming off their worst trading weeks in eight months as fears rise over the prospects of a Greek exit from the eurozone. Yonhap

By Kim Tong-hyung

It was already a dismal year for the Korean economy when the eurozone debt crisis took a turn for the worse and decimated stock markets.

With a sharp pullback in trade surplus in recent months badly exposing the country as a one-trick export pony, beleaguered policymakers here are hanging to every word coming out of Europe as it nears the moment of truth for its single currency.

Extended turmoil in Europe, which surely wouldn’t help the precarious situations in other major markets like the United States and China, is seen as a serious threat to derail Korea’s fragile recovery.

Worsening global conditions are already kicking the country’s export juggernauts in the teeth in areas like technology, steel and shipbuilding. And consumers can’t be counted on to pick up the slack when family finances are in need of a deodorant.

Korean shares are coming off their worst trading weeks in eight months as fears rose over the prospects of a Greek exit from the eurozone and the affects of a toxic Spanish banking system.

The Korea Composite Stock Price Index (KOSPI) suffered its worst daily percentage decline of the year on Friday, falling 3.4 percent to close at 1,782.47 points, down 7 percent for the week and crashing through the sentimental 1,800 point line.

Foreign capital flight accelerated as well. Friday marked the 13th straight session where foreign investors were seen running screaming from the Korean market, with their net outflow measured at 3.2 trillion won (about $2.7 billion) during the stretch.

Analysts say that the heady mix of negatives facing the economy from inside and out suggests that Korea has more blood to spill before it manages to halt it.

``While there is some hope tied to the European summit scheduled for May 23, enthusiasm was curbed after disagreements were exposed in the Germany-France meeting last week. This doesn’t seem to be the time to promote optimism,’’ said Lee Seung-woo, a researcher from Korea Development Bank (KDB) Daewoo Securities.

``Foreign investors are disposing their shares in massive amounts at every spot, so there is nowhere to scramble and duck right now. Uncertainties loom and this will be a tough market for some time, at least until the end of June.’’

Korean exports managed a 3 percent annual increase in the three months through March, dramatically off its pace of a 29.6 percent year-on-year rise during the first quarter of last year and a 35.8 percent jump from the same period in 2010.

Subduing shipments across the key information technology items are particularly concerning. Korea’s information technology exports have posted an annual decline in three out of the four first months of the year, with a 4.5 percent rise in February proving to be temporary. On a month-to-month basis, information technology exports have been sliding consecutively since July last year.

While technology giants like Samsung and LG have posted respectable earnings results this year on rising sales of finished products like smartphones and televisions, they are struggling to cope with weakness in their parts businesses like liquid crystal displays (LCDs) and computer memory chips.

Samsung Electronics and LG Display are both seen reorganizing their flat-screen divisions in anticipation of long-term sluggishness, while SK hynix, the world’s second-largest memory chip maker behind Samsung, appears to be at a loss marred in its third consecutive quarter in the red.

And for Korea’s once-mighty shipbuilders that have depended greatly on orders from Europe, the times truly have been disaster upon catastrophe.

Korea’s external troubles have been coupled with softened consumer spending domestically, underlining worries the subduing economic activity will prove to be worse than feared.

Korea’s historically-high household debt, at near one quadrillion won, matches an entire year’s GDP, while an alarmingly large portion of working-age Koreans remain sidelined from the labor market.

There have been concerns over the outcome of Greece's upcoming anti-austerity election, which was scheduled after parties failed to agree on a coalition government following an inconclusive poll taken earlier.

Observers believe that the Greek parties calling for the rejection of the austerity measures, which are the conditions of international efforts to rescue the debt-crippled state, could gain more from the new election to be held sometime next month. A result in their favor may bring an end to the country’s membership of the euro, an outcome that is starting to look inevitable as fears rise over a run on Greek banks.

Greece’s departure from the euro may also trigger a massive flight of deposits from other precarious nations like Spain, Portugal and Italy to safer destinations like Germany, Britain and America. Stemming this would require the economies to impose capital controls, but this will virtually kill the euro as a single-currency experiment.