♠ Posted by Emmanuel in Credit Crisis at 10/19/2008 05:57:00 PMDuring the Asian financial crisis of about a decade ago, South Korea faced difficulties due to large-scale foreign borrowing. Trouble arose when the country had to service these loans as a current account shortfall caused by waning exports pressured the local currency. Consequently, these foreign borrowings became much dearer to service given a weakening Korean won. When the ROK's reserves were well and truly depleted, it was time to turn to the IMF.
Fast forward to the present time and the story appears similar, with a few exceptions. First, Korea's reserves are much healthier now as its exports were strong during the intervening years. At last count, South Korea has $235 billion in reserves to face the current situation with. Second, there are now regional safeguard mechanisms which should kick in if matters worsen, forestalling a seemingly unlikely trip to the IMF. However, the main problem that remains unsolved is Korea's reliance on foreign borrowing, especially in comparison to other countries in the region. As export markets like the US dry up and the won weakens yet again, it will be interesting to see how things play out.
Bloomberg discusses the ROK's efforts to shore up confidence in the country's banking system despite its sizable external obligations and slowing export industries:
South Korea will guarantee $100 billion in bank debts and supply lenders with $30 billion in dollars to stabilize its financial markets. The government will provide tax benefits for long-term equity and bond investors, while the Bank of Korea will buy repurchasing agreements and government bonds to boost won liquidity, the heads of the finance ministry, central bank and financial regulator said in a statement from Seoul. Policy makers held an emergency meeting on Oct. 17 to hammer out the plan.
South Korea is struggling with Asia's worst-performing currency, a shortage of U.S. dollars and a stock market that has lost 38 percent this year. The guarantee on bank debts comes after Standard & Poor's said last week it may cut the credit ratings of the nation's largest lenders, which triggered the worst plunge in the won since the International Monetary Fund bailed the nation out in December 1997.
``They have to do that because the market was pushing them by attacking the Korean won,'' said V. Anantha-Nageswaran, chief investment officer for Asia Pacific at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager for the wealthy. ``They know what the stakes are. The currency could completely careen out of proportion.''
The government and state-run lenders including Korea Development Bank will guarantee as much as $100 billion of external debt taken up by Korean banks from Oct. 20 to June 30 next year, according to today's statement. The guarantee is valid for three years.
South Korea joins countries in Europe, along with Hong Kong and Australia, in providing state backing to banks to help fund lending amid a global financial crisis. ``We will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market,'' Finance Minister Kang Man Soo told reporters in Seoul, at a press briefing with central bank Governor Lee Seong Tae and Jun Kwang Woo, head of the Financial Services Commission.
S&P, in a report released Oct. 15, said South Korea's banks face a more than 50 percent chance the credit crunch could threaten their foreign-currency funding. Domestic lenders have $235.3 billion of foreign-currency liabilities, with about $32.7 billion due to mature in the fourth quarter, according to the Financial Supervisory Service.
``Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans,'' Moody's Investors Service said in an Oct. 16 report. That's forced them to rely on the wholesale [interbank] market for about 44 percent of their total funding, with international markets accounting for as much as 12 percent, the ratings company said.