Financial markets unstable in S.Korea following Cheonan sinking

Posted on : 2010-05-26 12:33 KST Modified on : 2019-10-19 20:29 KST
Analysts predict continuing market instability since three issues affecting the market cannot be solved in the short-term
 May 25. Signboards behind them show the plunge in the stock market and currency exchange rate.
May 25. Signboards behind them show the plunge in the stock market and currency exchange rate.     

The “Korean Risk” has once again reared its head in the Korean financial market, already experiencing rising instability due to the European financial crisis, in the aftermath of the aftereffects of the sinking of the Cheonan. “Korean Risk,” also known as the “Korean Discount,” is a phenomenon in which the rating of the Korean economy falls due to the geopolitical dangers of inter-Korean confrontation, and has not been easy to find in the local financial market since the June 15 Joint Declaration of 2000.

Three Misfortunes Over the Market

On Tuesday, local stocks and the exchange rate fell by the largest amount this year. In particular, as the “North Korean risk” has appeared following the Cheonan sinking, the foreign exchange market went into a state of panic. For a fourth day, spooked foreign investors sold their Korean stocks, dumped won and bought dollars. After the government’s announcement that North Korea sank the Cheonan in a torpedo attack, the won-dollar exchange rate climbed 9 percent (103.4 won) in just four trading days. That is the extent of the falling value of the Won. The government and financial authorities intervened Tuesday to put out the flames, but could not stop distress selling.

“The market was gripped by a trend in which figures and levels made no difference, and if it had not been for the intervention of authorities, the won would have shot past the 1300 mark,” said one foreign exchange dealer.

Experts say that the turmoil in the local financial market Tuesday was due to three misfortunes: the continuing problems in Europe, with Spain nationalizing banks, U.S. President Barack Obama’s financial regulations, and Korea’s geopolitical risk.

“A dumping is taking place because bad news is flooding in at once, and since nobody is buying, the stock prices are falling,” said Oh Hyeon-seok, head of the investment strategy team of Samsung Securities. “Since the market has been overshooting low, it could drop to as low as 1500.”

Kang Hyeon-cheol, the head of the investment strategy team of Woori Investment and Securities, said Asian stocks had dropped by 2 percent in price due to the European risk, and in the local market, stocks dropped an additional 1 percent due to the North Korea risk.

Government Seeking to Reduce Impact on Credit Rating

Just last weekend, when the government was inspecting the impact of the Cheonan sinking, it believed the negative impact on the market would be temporary. This was mostly based on the Korean economy’s sufficient capability to absorb external influences, considering its quick economic recovery, financial health and sufficient foreign currency reserves. With the local financial market falling much further than expected, however, the government has begun holding emergency meetings to prepare measures. A Financial Supervisory Service official said it appears foreign investors believe the government’s measures following the sinking of the Cheonan to be stronger than expected.

The government has voiced concerns that international credit rating agencies might react sensitively to geopolitical risk. Deputy Finance Minister Shin Je-yoon visited Moody’s in New York on Tuesday to actively explain that the impact the Cheonan would have on the Korean economy would be limited. Shin said he decided on the visit because sitting down with them to explain would have a greater effect. He said there were some external uncertainties, but because the fundamentals were good, he did not believe there would be an impact on South Korea’s credit rating.

Highly Variable Situation to Continue

There are many analysts, however, who have said that since the North Korea and European risks cannot be resolved in the short-term, the variability in the local market will continue for the time being.

In particular, there is concern that for a considerable amount of time, investors will avoid currency and stocks from emerging markets as the preference for safe assets grows. South Korea’s credit default swap (CDS) premium has been recording its highest level of the year after the announcement of the Cheonan investigation results.

Samsung Futures analyst Jeon Seung-ji said, “The exchange rate could quickly recover due to the nature of the foreign exchange market, but since the geopolitical risk and European issue are not factors of instability that could be resolved in the short-term, the instability in the market will continue for the time being.”

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