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Central bank warns of foreign capital outflows

South Korea’s central bank warned Sunday that foreign capital could flee the country if eurozone debt woes spread into a banking crisis and the U.S. economy sharply slows.

“As uncertainty in global financial markets rises, there is a possibility that foreign capital flows will become unstable,” the Bank of Korea said in its semi-annual financial stability report.

“In particular, if the eurozone debt crisis hit the region’s banks, thereby accelerating their deleveraging, and the U.S. economy fast cools down, we cannot rule out a chance that foreign capital could leave Korea en masse.”

The report came as dimmer global economic outlooks and Europe’s sovereign debt crisis increased economic uncertainty, prompting investors to sell riskier assets, including Korean stocks.

At the height of the 2008 global financial crisis, South Korea suffered severe capital outflows and the local currency sharply fell against the dollar, even though the crisis did not originate from here.

Quantitative easing steps by the U.S. have led more liquidity to flow into emerging countries, pushing up currencies and stocks and sparking risks of high inflation.

The BOK said stock funds from Europe and the U.S. were withdrawn from South Korea in August and September when global financial markets underwent gyrations, hit by the first-ever credit downgrade of the U.S. and Europe’s sovereign strains. But foreigners still snapped up bonds in the Seoul markets, with the weight of their bondholding reaching 6.9 percent as of end-September.

The BOK warned that South Korea could undergo a sudden reversal of capital if the contagion of the eurozone debt crisis become serious.

“Since the global financial crisis, South Korea has had larger foreign capital inflows than any emerging countries. The weight of funds from Europe and the U.S. also stayed at a high level,” the central bank said.

As of the end of September, stock funds from the U.S. and Europe amounted to $203.5 billion, accounting for 75.5 percent out of the total foreign stock funds. Their bond investment reached $40.1 billion, making up for 53.1 percent out of aggregate foreign bond funds.

The central bank added that local banks’ foreign currency borrowing could be rapidly recalled if Europe’s debt crisis intensified.

The spread of Europe’s sovereign crisis could deal a relatively heavy blow to South Korea as local banks’ foreign currency borrowing highly depends on European banks, it added. The BOK also noted that the ratio of local banks’ foreign currency borrowing against the economic output remained higher than that of other countries.

Meanwhile, the central bank said financial status of some local credit card firms are feared to deteriorate and they may face a liquidity crunch.

According to the central bank, 18 trillion won worth of bonds issued by credit card firms, or 52 percent of the total outstanding, were due to mature before the end of 2012.

“Credit card firms may face liquidity shortage in times of economic downturn, as financial institutions move to collect their lendings to card issuers,” the central bank said. 

(Yonhap News)