하나은행 하나금융연구소

European Union approved a second bailout to Greece worth of EUR 158.6 billion in an emergency summit held on July 21st.

● Amid delayed financial reform agreed upon the previous bailout last year and persistent negative growth, there have been talks calling for additional bailout package for Greece since early this year.

● With the decision for another round of financial rescue hindered by debates on private debt restructuring, there were mounting fears that the uncertainties in the financial market might contaminate Italy as well, the 3rd largest economy in the zone.

● Under the circumstances, EU agreed to offer sweeping bailout package to Greece worth of EUR 109 billion or 158.6 billion including private debt restructuring, and to expand the power of EFSF.

-The EFSF will act on the basis of precautionary action, with its role expanded to finance recapitalization of financial institutions and to intervention in the secondary markets.

● Although the decision is hardly considered a fundamental solution given its ineffectiveness in enhancing the member’s solvency itself, it is still meaningful in that EU affirmed its strong determination to prevent contagion of neighboring members and spread to the financial sector.

Nevertheless, Ireland and Portugal are highly likely to ask for additional bailout funds, while Spain and Italy, whose economies are relatively in a good shape, are not safe from a potential liquidity crisis.

● Persistent current account deficit poses a question over whether countries with large external debts can continue to redeem their debts. Ireland and Portugal, in particular, are likely to request additional rescue funds or require debt restructuring as it was the case with Greece.

● on the other hand, despite their low chance of solvency crisis given comparatively sound economic indicators including external debt and growth rate, Spain and Italy may experience a liquidity crisis from the growing instability of financial markets.

● To address the fiscal crisis in the Europe created by growing gaps in economic performance in the eurozone, the key is to enhance fiscal soundness by revamping regional governance and to conduct expansive restructuring in the overall economy.

● In enhancing regional governance, eurozone members subject to strict austerity and restructuring may find themselves more and more tempted to leave EMU, unless they are offered special benefits for staying in the union.

- It is mainly because withdrawing from EMU would allow them to resort on currency depreciation as a way to enhance external competitiveness.

● Given that, the future course of EMU should be decided by whether EU will allocate more budget for continued financial assistance to members in crisis. The union’s existence is expected to serve the interests of Germany and other leading members, but it remains to be seen how they will deal with opposition to greater fiscal integration.

Caution should be taken to effectively respond to growing instability in the global financial market, and sudden and massive outflow of foreign investment and export contraction in the Korean market.

● The fiscal crisis in Europe may raise euro volatility, and when it gets worse, result in overall adjustment in the global financial market and dollar liquidity crunch.

● The fact that European banks account for 54% of Korea’s debts owed to foreign banks and that around a third of its foreign portfolio investment comes from Europe signals that it is possible that Korea may see dramatic foreign capital flight in the local market.

● Its real economy can be also subject to spill overs such as export contraction, given Europe’s share of 15% in Korea’s total exports.