금융시장
Changes in Financial Market Environment after QE2 and Their Implications
2011-10-10KIM, Wan Joong
목차
요약
Global Economic and Financial Market Trends after QE2
Concerns over economic slowdown in the US and spread of European fiscal crisis into a wider region may slow down the global economy
● The US economy is faced with potential slowdown spurred by sluggish economic activities including GDP growth, employment, household consumption and housing demand which all stood at a lower level than the market expected. The Fed decided to keep its benchmark interest rate at near zero until mid-2013
● The fiscal crisis in Europe has further spread into Spain and Italy in July owing to delayed progress in agreement to bail out Greece, heralding a slowdown in the euro zone as evidenced by sluggish growth and falling leading indicators
Investors are now pulling their money on a massive scale out of emerging markets which enjoyed global fund inflow in the wake of recovery
● Despite government bond yield hikes in major advanced economies, fueled by expectations for the US economic recovery and subdued European fiscal crisis early 2011, the yields fell in leadng advanced economies due to more financial instability since July while those of EU members with fiscal difficulties soared
● At the same time, liquidity supply during recovery flew into stock and bond markets in emerging economies as well as global commodity markets, putting upward pressure on prices, which in turn may cause higher volatility in the financial market in case of global capital fligh
US Treasury Bond Market after Its Sovereign Rating Downgrade
The downgrade weakened the status of US treasury bond, but there are no alternative options
● The US witnessed its credit rating downgraded owing to persistent fiscal concerns despite the Congressional agreement to raise the nation's debt ceiling, and the weakened status of US treasury bond, a benchmark for financial transactions, further aggravated uncertainties surrounding the global financial market
● However, despite the downgrade, chances are slim that financial institutions in and out of the US will rush to sell off treasury bonds, given that there are no alternative options
US treasury bond sell-off at slow pace may lead financial instability to slow down
recovery
● Treasury bond sell-off and interest rate hike, affected by higher credit risk of the US, will cause temporary capital crunch and investment loss, as well as slowdown of economic recovery
● Although unlikely, competitive sell-off as a part of foreign reserves diversification strategy may create a vicious circle of plunging dollar and interest rate hike, financial market instability, and sluggish real economy
Financial Instability : Future Course and Expected Impacts
Concerns for a US double-dip and little progress in policy coordination in Europe fueled global financial uncertainties since August
● Few policy measures are available, considering burdens for implementing additional quantitative easing by the Fed and inevitable austerity measures by the US government
● As lack of consistent policy coordination to deal with European fiscal crisis heightened the risk of contagion to other economies in the region, large-scale European financial institutions with exposure to countries in crisis may face higher risk of credit crunch
The following three scenarios can be drawn depending on whether regional coordination efforts can be resumed in Europe and the US stimulus package will be effective
● Baseline Scenario : more agreements between European leaders and effective implementation of the US stimulus may ease external instability and help the Korean economy to soft land
● Bad Scenario : persistent fiscal concerns in the euro zone and ineffective US stimulus package may result in temporary liquidity crunch and another dip for the US economy, which will again fuel significant slowdown of the Korean economy and foreign reserves liquidity crisis
● Worst Scenario : fiscal crisis spreading into Italy and France may threaten EMU, and botched implementation of additional stimulus in the US will aggravate global financial instability, leading the Korean economy to suffer a significant drop in exports
Foreign Portfolio Investment Trends and Foreign Currency Liquidity Conditions
Foreign capital started to flow in again after the financial crisis to benefit from rapid economic recovery, undervalued stock market and potential currency gains
● The inflow, however, slowed down owing to sluggish stock market in emerging economies and capital in/outflow regulation, and sizable foreign capital flight was observed in the stock market in August, which was driven by concerns for US economic slowdown and fiscal crisis in the euro zone, fueling financial instability in the local market here in Korea
● In the wake of the global financial crisis, foreign investment in bonds continued to grow, affected by prospect of stronger won, arbitrage opportunities and foreign exchange reserves diversification of central banks in emerging economies, with growing investment in long-term government bonds, in particular
● Foreign investment in bonds is likely to keep growing, with renewed pressure on won appreciation and rising demand for non-dollar-denominated assets expected when financial instability is lessened
Foreign currency liquidity is deemed good enough, given foreign currency reserves, short-term external debt ratio and current account surplus
● Still, there is a possibility that Korea may face greater risk in foreign currency liquidity when foreign portfolio investors start to pull their money amid worsening external conditions and European financial institutions redeem their investment in response to more severe liquidity crunch
Recommended Responses to Financial Instability by Financial Institutions and Government
Tighter monitoring is required on developments of the crisis and its triggering factors (e.g. US economic indicators, government bond maturity schedule of countries with fiscal difficulties, etc.)
● Moreover, the government needs to focus on managing soundness of economic players to ensure financial stability by way of enhancing policy credibility, raising sovereign credit rating, and formulating crisis management plans with diverse impact sources and scenarios taken into account
● For the financial institutions' part, they should tightly monitor risk factors including economic and market interest rate trends in order to be better prepared against growing volatility in the financial market, while diversifying financing structure and ensuring sound investment management