Chapter 6: An Analysis of the Ripple Effects of the Global Financial Crisis on the South Korean Economy and the Recovery
* Jungeun Kim, Kyeong Pyo Ryu and Doowoo Nam 1 IMPACTS OF THE GLOBAL FINANCIAL CRISIS After the US subprime crisis started about the end of 2006, the South Korean economy continued to be in a sound basic economic condition for some time. The bankruptcy of Lehman Brothers on September 15, 2008 triggered the serious financial crisis throughout the world, and the uncertainty surrounding the Korean economy also increased significantly. The instability in the global financial system began to seriously affect the Korean financial markets, incurring the unfavorable movements in its interest rates, exchange rates, and stock prices. This adversely affected the real sector, lowering employment, consumption and investment in the Korean economy. To make matters worse, the world economic downturn caused by the turmoil in the global financial markets slowed down its exports. But the turmoil of the Korean economy was not as serious as that of the United States due to the low delinquency rate in consumer loans, the low degree of securitizing the loans for project financing related to large-scale real estate development, and various regulations on the soundness of financial institutions. Thanks to the efforts of the Korean government to stabilize the foreign exchange market and to prevent the economic depression through decisive fiscal policy measures including tax cuts, in just one year after the Lehman Brothers débâcle, the Korean financial markets and the economic indicators for its real sector started to return to the pre-débâcle levels. As shown in Figure 6.1, the...
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