South Korea has been gripped by fear over the possibility of a financial crisis, but rumors suggesting trouble have proven groundless. The won-dollar exchange rate, which has surged in a relatively short time, is now stabilizing, and the stock market has reversed its slump. The International Monetary Fund said in a report that the current won-dollar exchange rate is not out of the ordinary. The stabilization of the country??s financial market comes naturally, considering the strengthened fundamentals of the national economy. Still, it has attracted significant attention, due to the widespread rumors of a so-called ??September crisis.?? It is widely believed that South Korea??s financial market will continue to stabilize, although there are some external risks.

The fears of a financial crisis stemmed from the credit crunch triggered by Fannie Mae and Freddie Mac, the two most important government-sponsored mortgage financiers of the United States, and the rumors of the so-called ??September crisis.?? The concern about the crisis stemmed from the maturing of foreign investors?? bond holdings in September. Foreign investors were rumored to be set to withdraw their capital from the local bond market en masse, especially in the second week of September. Foreigners held South Korean bonds worth about 8 billion dollars that matured on September 11th, and had they withdrawn all their investments, it could have caused another foreign exchange crisis.

The fears of a financial crisis were based on unreliable assumptions. First of all, it is almost impossible for foreign investors to completely withdraw their capital from the local bond market. Even if they withdraw their capital, and abandon the Korean market altogether, it wouldn??t cause a monumental problem. The country??s foreign exchange reserves are worth much more than 200 billion dollars, comfortably covering the country??s nominal short-term debt. In a word, the fears of a financial crisis were groundless.

However, at the outset of September, the exchange rate surged and the stock prices plummeted. Fears led to a sense of crisis, which, in turn, threw the financial market into a panic. Some speculated that a sense of crisis could bring about a real crisis. But with the passage of time, foreign investors increased, rather than withdrawing investment. By the 10th of September, foreign investors snapped up a net 2.1 trillion won, or 1.97 billion dollars worth of local bonds. Things turned out quite the opposite. The U.S. government??s announcement of the bailout of Fannie Mae and Freddie Mac also played a part.

The South Korean economy and financial market proved to be solid and strong this month. By successfully overcoming the fear of capital flight, Korean corporations and banks have demonstrated they??re much healthier than they were before the 1997 foreign exchange crisis, and Korean exporters have proved resilient amidst the global slowdown. So, it is a good time for foreigners to invest more in the Korean market.