Will Korea suffer a repeat of the 2008 financial crisis?

Fears are mounting in Korea over a repeat of the 2008 global financial crisis triggered by the collapse of U.S. investment bank Lehman Brothers.

From the perspective of indexes in the financial market, the Korean economy is in crisis. Since last month, the won has fallen more than 100 points against the U.S. dollar and the Korean benchmark stock market index KOSPI has plunged more than 100 points in one day.

The government`s comment that the Korean economy`s fundamentals are "stronger than those three years ago" is no different from that made three years ago. Back then, Seoul said, "Our economic fundamentals are stronger than those 10 years ago, when the (Asian) currency crisis hit the nation."

Will the Korean economy suffer another financial crisis? Experts warn that carelessness could cause the Korean economy to falter in an instant though economic fundamentals have strengthened from three years ago. They said unfavorable external factors can trigger a crisis regardless of the amount of Korea`s foreign currency reserves and export volume.

If the government, which plays the role of a helmsman, makes the wrong judgments in a world where global financial markets are interconnected, the Korean economy can collapse at any moment. This is mainly because Korea has a small and open economy.

The credit default swap spread, the barometer for risks to Korea`s sovereign bankruptcy, rose to 2.02 percent Friday, up 0.73 percentage points from early this month. The figure is 0.05 percentage points higher than 1.97 points of France, which recently saw its biggest bank BNP Paribas suffer a bank run.

The situation is reminiscent of what happened in September three years ago when Lehman Brothers went belly up.

The credit default swap was 1.27 percent on Sept. 1, 2008, but rose to 1.80 percent at the end of the same month. Fears over the "September crisis" eased, but the situation worsened as the spread soared to 6.99 percent on Oct. 27 the same year. The Korean government came to the economy`s rescue Oct. 30 by sealing a currency swap deal with the U.S.

In September 2008, the won fell 91.4 points from 1,115.5 to the U.S. dollar to 1206.9. The won nosedived with the won-dollar exchange rate growing 104.7 points from 1,061.3 to 1,166 in September this year, however. The largest fall in the won`s value over the first eight months this year had been 13.3 points in January.

Foreign investors net sold 3.89 trillion won (3.32 billion U.S. dollars) worth of Korean stocks in September 2008, but the figure in September this year was 2.28 trillion won (1.95 billion dollars). Foreign investors once again raced to withdraw their investment from Korea amid unfavorable external factors.

january@donga.com