World economy has been experiencing the most critical crisis since the Great Depression in the 1930s. Euro crisis which started from Greek financial deficit has now spread to Spain’s bank crisis. At the executive council meeting on June 4th, Seok-dong Kim, the chairman of Financial Services Commission (FSC), diagnosed the global economic challenge to have originated fromEurope.
At the meeting, Kim emphasized the importance of the ability to confront crises. He discussed the possible reasons behind deteriorating crisis inEurope, stating the conceptual problem of the single currency as well as the Greek government’s failure to respond expeditiously.
The ambiance of the meeting room grew tense as the debate moved on to the Spanish crisis. Since, the economic size ofSpainis five times larger than that ofGreece, if theSpain’s crisis becomes a reality, the impact on the world economy and the financial market will be beyond imagination. Given the situation, Kim requested people to realize the seriousness of the current situation and to take proactive measures.
During the meeting, the executives suggested another analogy. The devastating circumstances of Euro crisis could not help but be compared to the unforgettable economic tragedy, the Great Depression. The similarity lies in each event’s strong momentum to shift existing economic paradigm into a new one. We have already witnessed the Great Depression drive out a principle of laissez-faire, and bring forth revised capitalism. Now we are on the brink of another transition to a newly advent paradigm, so called capitalism 4.0*, which will highlight the market autonomy with better stability and order, the protection of investors, and social responsibility. As one of the main organizations responsible for the installation of capitalism 4.0 inKorea, FSC and financial fields will have to carry out these adaptations with much care to overcome the crisis.
*capitalism 4.0 – refers to the latest version of capitalism. The idea was suggested in the book Capitalism 4.0: The Birth of New Economy in the Aftermath of Crisis by Anatole Kaletsky. Briefly, capitalism 1.0, 2.0, 3.0 and 4.0 matches to Adam Smiths laissez-faire, Keynesianism after the Great Depression, Regan’s new paradigm after the stagflation in the 60-70s, and the well balanced capitalism in construction today, respectively.
What we have done
Thanks to many experiences from 1997 Asian financial crisis and 2008 global financial crisis,Koreais already well trained for crisis management. First of all, Korean government has cleaned up the troubled savings banks which were one of the most obstructive factors. Twenty savings banks which amount to 40% of its assets were successfully cleaned up without injecting public funds. This successful action curbed the spread of distrusts and anxieties from other banks. Moreover, a well-planned-out strategy was established by the government to control household debts. Policies such as microfinance were reconsidered within this context to include the lower income households.
In addition, the plans against the danger of bubble in Korean capital market are in smooth progress. The amount of call money on stock firms has decreased from 13.9 trillion won in May 2011 to 8.2 trillion won this May. The credit loan balance was reduced by 38.5% this year. Speculative trades are restrained by raising FX margin deposit and planning to make healthy ELW market. Lastly, Stress test of banks inKoreahas been performed since the second quarter of 2011, earlier than any other countries. At the same time, delivering medium and long term foreign funds has expanded. These efforts fostered the ability to react against the foreign capital deficit which was one of the most vulnerable at every crisis in the past.
What we have to do
Chairman Kim insisted that even though we have made a considerable effort to build strong risk-handling system against the financial crisis, all our endeavors may become useless if not equipped with proper policy and prompt reaction. With this in mind, he addressed that the crisis management plans should be ready to be applied whenever they are needed. A brief outline of future direction of policy is as follows.
As mentioned before, one of the continuous issues for Korean economy was how to cope with the market volatility. The vulnerability of Korean market has always been the high dependence on foreign capitals. However, through constant inquiry, FSC has come up with numerous methods to mitigate the fluctuation. FSC will strictly regulate the short selling by improving transparency. At the same time, intensive monitoring on ELW and FX margin trade will be conducted. These will encourage removing immoderate speculative trading and restructuring foreign dependent capital market.
Another point brought up was the significance of protecting small and medium enterprises (SMEs). These enterprises are what consist of so called “the real economy”. The real economy takes up a considerable ratio of trade not only with GDP but also with the capital market. Moreover, the real economy is also a vulnerable subject to further proliferation of Euro crisis. Thus, it is inevitable assignment for FSC to establish a secure bulwark to help SMEs survive through the crisis.
On top of all these efforts, Kim promised that FSC will take endless actions against the potential crisis and market jitters with much readiness and investigation.