2008 financial crisis and the KOSPI cut in half

SHOBO's 18 years start in 2008, the year bad US mortgages brought down the global financial system. This is what that year did to Korea's market.

From subprime to Lehman

It started with US subprime mortgages. Lenders had made home loans to borrowers who could barely repay, and those loans were packaged into complex derivatives held by financial institutions around the world. When US home prices began falling in 2007, nobody could tell where the losses sat or how large they were. In March 2008 Bear Stearns was sold at a fire-sale price. On September 15 the 158-year-old investment bank Lehman Brothers went bankrupt, and the crisis became a panic. Banks stopped lending to each other, and the credit freeze spread overseas and into the real economy.

Korea: KOSPI halved, won past 1,500, KIKO losses

Korea took the hit in full. The KOSPI, near 1,800 at the start of the year, fell to about 900 in October, losing half its value in under a year. Foreign investors pulled out, and the won, which began the year in the 900s per dollar, weakened to around 1,500. Dollar funding between banks dried up, and people talked openly about a repeat of the 1997 currency crisis.

The weak won also hit exporters, who should have gained from it. Many small and mid-sized exporters had signed KIKO contracts, currency hedges that only worked if the won stayed strong. When the dollar soared, the contracts produced huge losses, and the money earned from exports went straight back out in derivative settlements.

Where the low-rate era began

Governments and central banks moved fast. The US Fed cut rates to effectively zero and began buying bonds outright (quantitative easing), and the Bank of Korea cut its base rate from above 5% to 2% within months. Markets bottomed and turned up in the spring of 2009. The cheap money and low rates put in place then stayed for years and drove more than a decade of rising asset prices.