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Analysts say concern over global crisis is overblown
By Jhoo Dong-chan
History repeats itself. So do financial crises.
Since the Great Depression in the 1930s, many crises have taken place on a regular basis offering painful lessons to the world. Unfortunately, such lessons were short-lived.
In retrospect, in every crisis, optimism prevailed over pessimism. This indicates that policymakers should listen to voices of concern from the pessimist camp.
It has been only 10 years since the 2008-2009 global financial crisis triggered by the U.S. subprime mortgage meltdown and the collapse of Lehman Brothers but there are renewed fears about another global financial crisis
Growing concerns about prevailing uncertainties following the U.S.-China trade dispute and currency crashes in emerging economies are spelling a looming fear that the 10-year cycle of global economic crises may materialize again.
Lehman Brothers, the world's fourth-largest investment bank (IB), went bankrupt on Sept. 14, 2008, initiating the global credit crunch. The aftermath then choked the world economy for years.
The then Federal Reserve Chairman Ben Bernanke conducted massive quantitative easing, for which he later earned the sobriquet "Helicopter Ben," to overcome the crisis.
A series of recent developments engulfing the global economy somehow resemble the 2008 global financial crisis, which is considered by many economists to have been the worst financial crisis since the Great Depression.
Turbulence in emerging markets
Emerging economies, including Turkey, Argentina, Russia and Indonesia, have been experiencing devaluation in their currencies since the Federal Reserve raised the U.S. policy rate twice this year. The Fed said it will raise the rate twice more this year.
Highlighting the ongoing trade war between the U.S. and China, a pile of reports are pouring in at home and abroad displaying economists' fears that the doomsday clock is ticking to an end.
Experts and market observers are divided on how to assess the gravity of the current global economic state.
"The Turkish lira and the following exchange crisis in emerging economies should be closely monitored," Yonsei University economics professor Sung Tae-yoon told The Korea Times.
"Earlier this year, $1 was worth 3.8 Turkish lira. It then reached 4.9 lira at the end of July. The currency dropped 30 percent from what it was worth in January. Due to Turkish firms' worsening profitability, foreign investors have since left the country."
Citing Turkey's deteriorating diplomatic relationship with the U.S., Sung noted the county's current economic crisis resembles Korea's crisis in 1998 when it had to seek an International Monetary Fund (IMF) bailout.
"Like Turkey, Pakistan is also experiencing difficulties in securing foreign exchange," he said.
"Pakistan has attempted to receive money from the IMF, but the U.S. is strongly opposing the request blaming the Middle Eastern country's close ties with China."
The U.S., which is engaged in a trade war against China, feared the bailout money could flow into China. Pakistan is one of China's closest partners in the latter's Silk Road initiative.
"Regardless of their diplomatic ties with the U.S., it's obvious developing countries around the world, including Argentina and Indonesia, are experiencing crises in foreign exchange. The risk shouldn't be overlooked."
China's mounting debt
Separate from the U.S-China trade dispute, China's growing debt-to-gross domestic product (GDP) ratio is raising concerns it could be a possible trigger for a global economic crisis.
According to the World Bank, the country's debt-to-GDP ratio stood at 260 percent last year, up 100 percent from the 2008 figure. Standard Charter said in a recent press release that it is one of the three riskiest countries with its bubble having grown to a dangerous level along with Argentina and Turkey.
Most market analysts, however, claim such pessimism is over-hyped.
"This isn't the first time," said Daishin Securities global strategist Moon Nam-joong.
"Emerging economies have, in general, seen a 12.1 percent decline in stock returns and a 13.2 percent decline in currency value so far this year. But things won't get worse anymore because Argentina recently managed to get approval for an IMF bailout while Turkey plans to raise its policy rate soon."
Stressing they have faced similar hurdles in the past, Moon claims emerging economies have become more tolerant to external factors.
"Their indices are still sound. What really matters here is investor confidence," he said.
"If they manage to continuously demonstrate moves to improve their financial state, they will bounce back."
IBK Securities analyst Kim Ye-eun agreed.
"There are concerns, but the impact of their weakening currency value on the Korean economy will be limited."
"The nation's exposure to emerging economies isn't very high. Despite the crisis there, foreigners have recently bought bonds, and stocks on the Seoul burse."
