In February 4th, sovereign risk of four southern European countries including Portugal, Italy, Greece, and Spain, so-called PIGS, stood out abruptly. Meanwhile, the global society has overcome the global financial crisis triggered by the problem of subprime mortgage and its derivative created by IB (Investment Bank) of the U.S. However, this European financial crisis along with another crisis from Dubai is accepted as the serious challenge to the world. Even, some experts point out this crisis will bring about the second Great Depression in 1930s.
The Root Cause
The root cause of this crisis is the sudden rise of the scale of the deficit finance of each government triggered by increased government spending in order to settle the global financial crisis. In this respect, with Greece first in order, the scale of the deficit finance of 4 southern European countries has attached to about 80%. 16 countries among 27 countries within Eurozone already belong to this scope. Particularly, in the last October 21st, Greece, one of PIGS as the seismic center of this crisis, reported the corrected estimation on deficit finance to Eurostat. According to the report, in late 2009, the ratio of the deficit finance versus the GDP is increased from 3.7% (6 month ago) to 12.7%. Moreover, the national debt is expected to reach to 112.6% versus the GDP. Simultaneously, this triggered the drastic surge of CDS (Credit Default Swap), which shows the condition of sovereign risk. Furthermore, as below, it is expected that the fiscal account of these countries in 2010 will be rapidly reduced compared with that of 2008.
The fiscal structural vulnerability of Europe does not feel renewed. It is originated from the higher welfare. Moreover, since the advent of the global financial crisis, it has been all more deteriorated. Particularly, indeed, this situation has been reflected in the credit rating by global credit rating agencies to each European country including PIGS as below.
In detail, meanwhile, Greece has had so much trouble due to extensive tax evation, inefficiency of administrative system, and rampant curruption. It aggravated the condition of national finance. Furthermore, Spain and Ireland have been proud of the highest credit rating for several years. However, since the collapse of property bubble, on account of the drop in tax revenue, the reduction of the attraction of foreign capital, and the increase of governmental spending to bloster the economy, their governmental finance has been rapidly aggravated as well. For instance, the non-collected tax amount of Greece accounts for 13.6% of GDP, almost 31 billion euro. It is below the average of OECD (Organization for Economic Cooperation and Development). Likewise, the government revenues of Spain have the decrease of 13.9%, whereas the unemployment rate has the increase of 20%. It is linked with the increased unemployment payment as a governmental spending.
Eventually, 4 southern European countries including Greece, which originally have susceptible fiscal structure and suffer from the entanglement of both fiscal inefficiency and credit bubble, could not overcome the global financial crisis. To be brief, they stamped as the problem child of Europe.
Overall, beyond Europe, the diffusion of this crisis into the global financial crisis is very worried. In particular, it might trigger the unrest of national debt of the U.S. and Japan. As above, the deficit finance of the U.S. and Japan is similar to that of PIGS or goes beyond them. Furthermore, the delay of exit strategy and the enlargement of deficit finance and chain reaction bankruptcy of 16 countries within Eurozone are concerned as well. For reference, Nouriel Roubini, the professor of NYU Stern School, known as representative Dr. Doom warns, “If the improvement of financial soundness on the countries, which suffer from enormous fiscal deficit, were delayed, even, the global financial market would threaten the U.S. and Japan.”
Spread and Aftermath of Financial Crisis from Europe and the Task for Korea
Above all, once, it is expected that the direct effect of the European financial crisis to Korea will be restricted due to the fact that the scale of exposure and loan on four southern European countries including Greece and the scale of domestic investment in Korean stocks by the countries are not huge. For reference, according to ‘FSC (Financial Services Commission) Weekly e-Briefing (2010.2.16): PIGS disease could spread to Korea?’, “the Korea’s exposure to these 4 countries account for merely 650 million USD from domestic financial institutions or 1.2% of our total exposure.” Furthermore, the scale of national debt of Korea merely accounts for 5.5% approximately a half of G20’s average of 9.8%. Moreover, Korea is backed up by trade surplus and foreign reserves over 270 billion USD. This fact derived the positive evaluation from IMF, WB (World Bank), and OECD on the Korean economic outlook. Nevertheless, as observing the possibility that the unrest of the countries will work to the risk factor of the global financial market, market monitoring ought to be strengthened.
Furthermore, there are several ripple effects from this crisis abroad. (1) Following spread of global financial crisis from Europe, a sort of deleverage progress aimed at the vulnerable countries on the fiscal soundness is supposed to be implemented. (2) The enforced fiscal austerity of each country and the reduction of stimulating policy of the economy of the sound financial countries will be triggered. (3) According to the enfeeblement of reserve power on bailout of governments, the restructuring with marginal firms as the core will be accelerated.
In these respects, the European financial crisis poses the significant tasks to Korea domestically. (1) Prior to the countermeasure against the global financial crisis, the comprehensive evaluation of the fiscal deficit, public debt, current account deficit, and overseas debt ought to be presupposed. (2) Recognizing the fact that sovereign risk of each country is inherent in not merely national debt, but corporate bond and stock, Korean government should inevitably prepare appropriate countermeasures that followed. (3) Attendant upon the enlargement of sovereign risk, since the selective bankruptcy and the increase of restructuring frequency are expected, the more active governmental countermeasure and the implementation of restructuring are required.
By Kim, Do Hyun (firstname.lastname@example.org)