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| U.S. Treasury Secretary Janet Yellen, left, talks with Federal Reserve Chair Jerome Powell before the start of the G7 Finance Ministers and Central Bank Governors' Meeting at the Toki Messe convention center in Niigata, Japan, Thursday. AP-Yonhap |
By Yi Whan-woo
The possibility of the U.S. government defaulting on its debt could cause repercussions in Korea and seriously dent its efforts for economic recovery, even though the chances of that happening are slim, according to analysts in Seoul, Friday.
The experts noted that the Korean financial market is highly influenced by the U.S. economy and a failure in raising the U.S. debt ceiling could undermine the value of stocks, bonds, currency and other financial instruments in Seoul.
Such volatility in Seoul's financial market will weaken investor sentiment as well as consumer spending, and thus further slow Korea's economy after it has already faced multiple downward revisions in its 2023 growth forecast, the experts said.
"I'd say it's matter of time for the White House and the U.S. Congress to strike a deal on the debt ceiling, but a failure to do so will send shockwaves to the global economy, including Korea's, as the U.S. sovereign rating will be downgraded," Hana Bank researcher Seo Jung-hoon said.
Seo was referring to a weeks-long standoff between the Joe Biden administration and the Republican Party over whether the federal debt ceiling should be raised, as the U.S government is close to running out of money to pay its bills.
The so-called "X-date" ― the point at which the U.S. will be unable to meet its financial obligations ― is estimated to be June 1.
Against this backdrop, U.S. Treasury Secretary Janet Yellen warned Thursday that a default would produce an "economic and financial catastrophe" that would trigger a global economic downturn.
Also on Thursday, the International Monetary Fund (IMF) warned that a default would have "very serious repercussions" for the U.S. as well as the global economy, including likely higher borrowing costs.
Julia Kim, head of research and planning at the Institute for Global Economics, downplayed the possibility of the U.S. defaulting on its debt but warned, "The longer it takes to reach a consensus over the debt ceiling, the higher uncertainty the global economy will face."
Kim said the impact of the U.S debt ceiling debacle on the Korean financial markets "appears to be imperceptible" at the moment, but could "ripple across a wide range of groups in the country's economy."
She explained the U.S. Treasury rates are likely to go up in the event of a default, which in turn will prompt a depreciation in the value of government bonds in emerging markets including Korea.
"Moreover, unfavorable investment circumstances can increase risks on corporate investment and private spending in Korea, which are crucial for its economic growth," she said.
Kim Wan-joong, the chief economist at Hana Institute of Finance, said the issues surrounding the U.S. debt are already affecting Korea's stock market and the won-dollar exchange rate.
He argued the benchmark KOSPI should be picking up pace and also the value of the Korean currency should be gaining ground against the dollar following the U.S. Bureau of Labor Statistics' announcement earlier this week that U.S. inflation eased to its two-year low at 4.9 percent in April.
The announcement suggests that the U.S. Federal Reserve is bringing prices under control following multiple steep rate hikes beginning in 2022, which prompted investors' growing preference for safe haven assets amid volatility in the financial markets here.
Nevertheless, the KOSPI went on losing streak for four days straight through Friday, while the dollar hovered around 1,300 won this week as witnessed when the Fed was hiking its policy rate aggressively last year.
The KOSPI has shed 1 percent this week. It fell 15.58 points, or 0.63 percent, to close at 2,475.42, Friday.
The won ended at 1,334.50 won against the dollar, Friday, down 8.2 won from the previous session's close.
"And I reckon all these worrisome signs are due to risk of a global economic downturn as suggested by Yellen and the IMF," Kim said.
