Crisis containment - (EDITORIAL from the Korea Times on Oct. 28)

YONHAP - An emergency interest rate cut by the central bank is designed to send a clear message that it is taking ``preemptive'' measures to avoid the knock-on effects of the swirling global financial crisis on South Korea.

On Monday, the Bank of Korea (BOK) slashed its key interest rate by 0.75 percentage points to 4.25 percent to help banks and businesses ease their acute shortage of cash. It is the first time for the central bank to lower the rate by such a big margin.

The action reflected simmering fears that the country might again fall victim to a
transnational financial crisis similar to the 1997-98 Asian crisis. What's important
is that the central bank should take preemptive measures to produce the desired
effects of its policy. In fact, the BOK has come under criticism for taking belated
action. It trimmed the rate by 0.25 percentage points on Oct. 9. But the cut came
too late to swiftly tackle the credit pinch.

Timing is quite important in dealing with a rapidly spreading financial crisis as
seen in the previous turmoil that forced the country to go cap in hand to the
International Monetary Fund (IMF) for a rescue program. In this regard, the Monday
rate cut is seen as timely and appropriate. It is necessary to calm the panic and
fear, which has continued to grip the markets, even with the shock therapy.

Echoing the BOK move, President Lee Myung-bak said in an address to the National
Assembly that the government is determined to provide unlimited liquidity in a
``preemptive, sufficient, and decisive'' manner until psychological unrest
dissipates from the markets. Lee vowed to step up international cooperation,
especially with China and Japan, to ride out the financial tsunami. He also promised
to expand budget spending and take other preemptive measures to stimulate domestic
consumption to cope with a global economic slump. He was confident that another
foreign exchange crisis, reminiscent of the one a decade ago, will not break out in
South Korea.

In 1997-98, South Korea was hit by a foreign currency shortage crisis, which led to
a virtual default on its external debts. But this time, the turmoil is a crisis of
confidence, which is causing investors to go on panic selling to dump local stocks
and the Korean currency. Regrettably, a loss of confidence easily gives way to panic
and fear. Most of all, policymakers should focus on regaining confidence in the
markets and the financial system.

It is time for all economic players ??? government, businesses and consumers ??? to
work together to prevent the roaring financial firestorm from battering the real
economy. The Lee administration is in crisis management mode. But it must not forget
that abuse or misuse of emergency measures may do more harm than good. The credit
crisis cannot be solved just by printing money. Loose monetary policies,
expansionary budgets and slackened regulations could end up squandering taxpayer
money without containing the crisis or boosting the economy.

Thus, policymakers and regulators are required to double their efforts to push
drastic financial and economic restructuring. Banks and companies should no longer
turn to state aid packages before implementing self-rescue programs. They can never
adhere to the myth of ``too big to fail.'' Let nonviable firms go under. Don't
forget the painful but valuable lesson learned from the Asian crisis.
(END)