![]() ![]() The rapid recovery from the crisis was due to, among other reasons, the reduced vulnerability of the financial and corporate sectors as a result of the restructuring following the 1997 crisis the reduction of home equity loans before the 2008 crisis due to various regulations and prompt policy responses to the crisis. Still, the pain was milder than during the 1997 crisis output returned to positive growth in the first quarter of 2009 (Figure 2-18). In the last quarter of 2008, exports contracted by 41 percent, investment by 45 percent, and output by 17 percent in annual terms. ![]() The industrial sector was also battered by the precipitous fall in exports and investment. ![]() The won weakened by 40 percent against the dollar between October 2008 and February 2009. Domestic banks faced serious difficulties in rolling over foreign debt. The stock market plunged by 40.7 percent in the course of 2008 and declined further by 5.5 percent in the first two months of 2009. The sudden capital outflow caused a severe credit crunch in the domestic financial market. The global crisis threw Korean financial markets into disarray. These problems produced asset price bubbles and increased the vulnerability of financial system. Blanchard (2009) points to four such problems 54 2) (1) the assets that were created and traded appeared much less risky than they truly were (2) securitization led to complex and hard-to-value assets being placed on the balance sheets of financial institutions (3) securitization and globalization led to increasing connectedness both within and across countries and (4) leverage increased. The American economy, the epicenter of the crisis, has had structural problems for years. But these shocks arose from domestic sources 1) and did not result from a global economic downturn. Even before the global financial crisis, there had been small and large shocks in the 2000s, such as the collapse of the KOSDAQ market in 2000 after the burst of IT bubble and the credit card crisis in 2003. In Korea, output shrank by 4.5 percent in the fourth quarter of 2008 (17 percent in annual terms). The global financial crisis that started with the fall in housing prices in the United States in 2007 became truly global in scale as Lehman Brothers filed for bankruptcy in September 2008. ![]()
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