Korea Joins the Bailout

South Korea was one of the major casualties of the 1997-98 “emerging markets” crisis. I put “emerging markets” in quotes because, at the time, Koreans were very proud that their country had the 11th-largest economy in the world. Today it is 13th, by nominal GDP.

Yesterday South Korea announced its version of the bailout plan that is sweeping the world – $30 billion in foreign currency reserves made available to its banks, and a $100 billion guarantee on new foreign debt of its banks. But in Korea, the stakes are higher than in the US and other G7 countries. Korea is another of those countries whose banks’ have a disproportionately high level of foreign currency obligations. Rolling those over suddenly got a lot harder in the last month, for reasons we all know; now as creditors fear that banks may not be able to pay them off, the currency declines, making them even harder to pay off, and so on. The central government has $240 billion in foreign currency reserves, but that may or may not be enough to support its banking sector, which has $235 billion in foreign liabilities.

Korea is important not just because my family is from there, but because it is so big, economically – three times as big as Iceland, Hungary, and Ukraine put together in GDP terms. If the crisis spreads to countries of Korea’s scale, it’s not clear that the IMF has the resources to bail them out (and an IMF bailout would be enormously unpopular in any case).

One thought on “Korea Joins the Bailout

  1. Interesting comment. Korea’s external debt (particularly short-term) certainly has risen rapidly raising concern over a potential repeat of 1997. In addition, Korea’s banks (unlike any other in the region) heavily rely on wholesale funding to support domestic lending. Overall, however, Korea’s external debt problem is a function of frozen credit markets rather than poor fundamentals.

    I think Korea’s domestic debt problem might necessitate further government action. The country is still over-leveraged; total non-financial sector debt is 220% of GDP higher than the US overall debt level and substantially higher than 1997 levels. Granted, the size of the Korean economy and banks’ lending practices have improved since then.

    However, a protracted slowdown in the global economy would expose weak domestic demand and likely lead to an unpleasant unwinding of debt by over leveraged consumers and SMEs alike. This, would in turn, lead to further write downs by banks due to a deterioration in asset quality. In that case, banks would have two options: 1) raise private capital; 2) public bailout. If the economic downturn and unwinding was severe enough, only the latter would likely be possible.

Comments are closed.