choongsoo kim : asia ’ s role in reviving global growth and financial stability dinner speech by mr choongsoo kim, governor of the bank of korea, at the international conference organized by the asian development bank, the institute of international finance, the kb financial group and the institute for global economics, seoul, 17 may 2012. * * * good evening, ladies and gentlemen. it is a privilege and a pleasure for me to speak here this evening. i am extremely grateful to chairman sakong for inviting me. as we have just enjoyed some splendid food, to boost our health and energy, i hope that my address now may serve as substantial food for thought for everyone in this room. i may risk ruining your appetites for dessert and coffee, but being a central bank governor, as you know, it is my job to take away the punch bowl when the party gets going. i would like to first briefly review recent economic and financial developments in the global economy, before addressing the challenges and opportunities faced by asia in repositioning itself in the new global financial scene. i. where do we stand? after four years of financial turbulence and economic uncertainty, the global economy is still in trouble, despite some signs of recovery from the fallout of the global financial crisis. the global economic outlook is improving only slowly, and the pace of recovery is uneven across regions. the us economy appears to have turned the corner, with improved risk appetite and real activities, while asia is leading world economic growth, albeit at a level below its potential so far. the euro area, on the other hand, has yet to escape the specter of its twin crises and stagnant growth. given its sheer economic size and dominant share in global banking, the euro area has been the major source of risk to global growth and financial stability over the past two years or so. the recent large - scale liquidity operation by the ecb, the so - called ltro, has helped to calm the financial markets and stabilize sovereign debt dynamics, at least temporarily. the ltro ’ s purpose, as i understand it, is to buy precious time for the conduct of necessary fiscal reforms and bank restructuring. unfortunately, the positive effects of the ltro seem to have been waning recently. the sovereign spreads of the highly - indebted countries are on the rise again, while the abundant liquidity is being hoarded by banks amid little signs of any increase in lending. i hope that the time bought by

the ecb through the ltro is used wisely, to put an end to the fiscal crises and the resultant financial instability. a natural question at this juncture would be how to consolidate the financial gains achieved so far, and what to do to pull the world economy out of its current troubles. i think revisiting the dynamics of the global financial crisis, and the ensuing fiscal crises in advanced market economies – or ames in short – could offer us clues to help answer these questions. ii. reversing the direction of real - financial and cross - border linkages let me be more specific. some eighty years of macroeconomic research and policy lessons guided us to the deployment of extraordinary monetary and fiscal stimulus measures in response to the global bis central bankers ’ speeches financial crisis, and these policies did pay off by enabling us to avoid another great depression. success was short - lived, however, as the world economy instead fell into the great recession. adverse feedbacks through real - financial linkages triggered fiscal crises in ames, particularly in the euro area, which pose threats to global financial stability even today. despite their own sound fundamentals, meanwhile, emerging market economies – or emes in short – have become the hostages of cross - border linkages, both real and financial, as they have faced weak and highly uncertain external demand, sharp reversals in capital flows, and heightened foreign exchange market pressures. as you may have noticed here, and as i should highlight now, there have thus been two types of linkages at the heart of the postcrisis economic and financial developments – real - financial linkages, and cross - border linkages. and the implication is thus that a global solution is necessary if we hope to return to a sustainable path of growth and financial stability. we live now in an interconnected world. and in an interconnected world, stagnant growth and fiscal crisis occurring in one region is no longer an isolated problem of that region alone. rather, it is a global problem, that has far - reaching implications for other regions and, ultimately, the world economy as a whole. i believe that our search for a global solution to the problems we now face should begin with a focus on reversing the directions of these two types of linkages – so that in place of negative spillovers we instead see positive feedbacks. and in fact, powerful real - financial and cross - border linkages are a basis for positive feedbacks just as much as they are a