[Initial Insight] 'At the Onset of Crisis' Prepare for All Scenarios

[Asia Economy Reporter Park So-yeon] The first half of next year, when interest rates are expected to peak. Experts agree that it will be the time to determine whether a serious crisis will hit our financial market. The basis for this is the theory of the '4 stages of financial crisis.' A financial crisis begins with a market shock, goes through a mechanical rebound, and reaches a stage of liquidity crunch. It then culminates in restructuring. Currently, we are already in the third stage, the liquidity crunch.

The prelude to the third stage, as is well known, is the liquidity crunch in the bond market triggered by the Gangwon-do 'Legoland incident.' Although the government announced it would supply more than 50 trillion won in liquidity, the market remains on thin ice. Market confidence in the government and authorities is not what it used to be. Ultimately, whether the financial market moves to the fourth stage of restructuring depends on how the government resolves this situation. As Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), said, no one can predict whether a recession will come or not. If a recession occurs, its severity is also unknown. Although no one can predict it, if signs of a crisis appear, all scenarios must be devised in advance and definite countermeasures implemented.

There are many criticisms that the current bond market convulsion was partly caused by the government's delayed response. A financial sector official with a background in the Ministry of Strategy and Finance said, "There is a truth learned from experiencing the IMF and financial crises," adding, "Policies must be implemented 'preemptively and sufficiently.'" If government intervention is needed but delayed even slightly or insufficient, the policy will be ineffective or only increase costs.

The government failed to contain the Legoland incident early on, spreading fear in the market. Despite deciding to inject an astronomical amount of '50 trillion won + α,' the situation remains unstable. Some voices say that if the central government had earlier pledged to support repayment of Legoland-related borrowings, the market situation would not have deteriorated so rapidly. At last month's National Assembly audit, Lee Chang-yong, Governor of the Bank of Korea, admitted, "It is true that we did not anticipate this happening early on," and Kim Ju-hyun, Chairman of the Financial Services Commission, said, "We will take all possible measures at this point."

Experts suggest various policy options. There is a need to promptly conclude a Korea-U.S. currency swap to minimize exchange rate rises caused by capital outflows. A sudden ban on short selling is also mentioned as a card to defend the stock market from foreign short-selling attacks. As a measure to prevent panic in the real estate market, the government could consider proactively purchasing distressed housing and converting it into rental properties.

Above all, bold measures are needed to address the real estate project financing (PF) defaults, identified as the crisis's trigger. If the unsold housing crisis materializes, defaults in the secondary financial sector such as capital companies, specialized credit finance companies, and insurance firms could occur in a chain reaction. There is growing support for proactively establishing a real estate specialized bad bank to support PF projects. Additionally, proposals have emerged for an interest reduction program for the 300 trillion won debt of self-employed individuals incurred after COVID-19.

Of course, these various solutions lead to debates about 'moral hazard.' These policies also have considerable side effects. However, active consideration is necessary as measures to maintain the overall soundness of the financial market. It is easier and more efficient to prevent the deterioration of normal bonds than to rescue dead bonds. This is why authorities must take responsible action despite side effects and criticism. If the government fails again in this sensitive market situation, it will be even more difficult to contain the crisis.

This content was produced with the assistance of AI translation services.