SEOUL - The office
of South Korean President Roh Moo-hyun urged
investors on Thursday not to overreact to the
global financial-market instability triggered by
the subprime-mortgage crisis in the United States.
Unfortunately, no one was listening,
neither in South Korea nor in the rest of Asia.
Across the region, from Sydney (down 1.54%) to
Singapore (down 4.3%), Manila (down 6.01%) to
Mumbai (down 3.7%), dealers were swimming in a sea
of red. Even the Shanghai bourse, to some extent
insulated from other markets, recorded a
heavy fall, with the Shanghai
Composite Index off 2.4%, following Hong Kong's
decline of 3.3% and Taiwan's 4.46% drop.
"Blood is hitting the streets. Everyone
seems to be panicking, and there's reason to
panic," Bloomberg quoted Patrick Chang of
CIMB-Principal Asset Management Bhd in Kuala
Lumpur as saying. "There's been so much blow-up,
we don't know when it's going to end. Liquidity is
drying up."
The repercussions in Asian
markets were bigger in comparison to the loss of
1.29% overnight on the Dow Jones Industrial
Average in the United States.
South
Korea's stocks plunged 6.93%, with the benchmark
Korea Composite Stock Price Index (KOSPI)
plummeting 125.91 points to 1,691.98. "The
subprime-mortgage defaults caused
larger-than-expected ripple effects," said Lee
Yoon-hak, an analyst at Woori Investment and
Securities.
The South Korean currency
closed at 946.2 won to the greenback, plunging
13.7 won from the previous close as offshore
investors scrambled to purchase US dollars after
dumping shares in the local market.
Experts fear that the rising defaults in
US subprime mortgages could result in an economic
slowdown in the United States and a global credit
crunch, and nervous investors have picked up on
the anxiety, whether it's justified or not.
"South Korea's stock market is overly
sensitive to the subprime-mortgage financial
crisis," a presidential spokesman said. "The
fundamentals of the South Korean economy are solid
... but we will quickly inject liquidity into
markets if it looks as if a credit crunch will
materialize here."
South Korean banks and
insurers invested a combined US$850 million in US
subprime-mortgage-related bonds as of the end of
July, with their combined losses coming to $85
million, according to government data.
In
Tokyo, stocks fell 1.99% to an eight-month low on
Thursday. The Nikkei-225 index of the Tokyo Stock
Exchange shed 327.12 points to end at 16,148.49.
And this was after the Bank of Japan (BOJ) had
injected 400 billion yen ($3.4 billion) into the
money markets in the morning. The US dollar was
trading at 115.88-115.90 yen late on Thursday,
down 1.05 yen.
Who carries the
losses? The complex nature in which
subprime loans are securitized and sold obscures
who will shoulder the bulk of the losses.
The cascading fallout from rising defaults
on home loans in the US extended to borrowers with
poor credit has weighed on Japanese stocks in part
on concern that foreign hedge funds will sell
their Japanese shares for cash.
Export-oriented firms sensitive to
consumer spending trends in the US have been hit
hardest. On Thursday, Toyota Motor Corp dropped
2.9%, Honda Motor Co dipped 2.7% and Sony Corp
declined 2.6%.
Individual investors in
Japan snatched up shares when stock prices
plummeted at the end of February, but they are
waiting on the sidelines this time. In addition, a
stronger yen has hurt individuals who moved money
from stocks to foreign-exchange margin trading.
US Federal Reserve Board chairman Ben
Bernanke said in congressional testimony last
month that financial institutions may shoulder $50
billion to $100 billion in losses due to defaults
on subprime mortgages.
In the case of the
savings-and-loan crisis in the US in the latter
half of the 1980s, costs associated with
Resolution Trust Corp's takeover of financial
institutions and bad loans reached 2% of nominal
gross domestic product (GDP).
Should the
losses related to subprime loans be at a level
predicted by the Fed chairman, they would amount
to less than 1% of US GDP, leading many market
players to believe that the impact on US financial
institutions will be limited.
The effect
on Japan's financial institutions is even smaller.
Losses related to the subprime-loan problem
disclosed by the three major banking groups -
Mitsubishi UFJ Financial Group Inc, Mizuho
Financial Group Inc and Sumitomo Mitsui Financial
Group Inc - come to just several hundred million
to several billion yen.
Despite these
figures, instability in the stock market continues
partly due to unease that new losses will come to
light. Some 80% of the balance of subprime loans
have been securitized, such as into residential
mortgage-backed securities. Because these have
been repackaged and sold to various investors, it
is difficult to see who will suffer losses, and
this is making stock prices fluctuate wildly.
To deal with the spreading subprime-loan
jitters, central banks in Japan, the US and Europe
have pumped large amounts of funds into money
markets since the latter half of last week in an
attempt to prevent a crisis in which financial
institutions lack the necessary funds for
settlements.
The moves were seen not just
as an attempt to alleviate credit concerns and
prevent a sharp rise in market interest rates but
as a clear indication from the banks that they
will do everything in their power to prevent a
panic.
The central banks will recover the
funds they injected when market instability
recedes or when open-market operations expire. The
BOJ absorbed surplus funds for two straight days
on Tuesday and Wednesday when the Japanese market
settled down, but was forced into action again on
Thursday.
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