Alan Greenspan in his book gives an insight into the Korean IMF Crisis. According to his book, the Korean government sought help from the Japanese help in renewing maturing debts of $8 billion. The Japanese refused the request and Kim Young Sam “reluctantly” turned to the IMF for help. The reason for the Japanese refusal? According to then political advisor Kim Gwang Il, Kim Young Sam’s “emotional” approach to Japan.
Then political advisor quoted Japanese leaders as saying “how can Tokyo help Korea whose President had said he would “teach” Japan. Kim Young-sam’s emotional approach to Japan was cited as one of factors that Korea was unable to get Japanese help, he recalled.
After this, the Bank of Japan tipped off Greenspan that South Korea will be the next to go. Greenspan was shocked to say the least.
This was a shock,” Greenspan wrote. “Korea was so successful that it was no longer even considered a developing nation _ the World Bank officially listed it as part of the first world.”
“Korea’s central bank was also sitting on $25 billion in reserves _ ample protection against the Asian contagion, or so we thought,” he said.
Greenspan said Korea’s financial crisis in 1997 was all the more shocking because the United States had mistakenly believed that the emerging Asian economic power had ample American dollar reserves.
He added what ensued was the largest financial rescue package ever by the IMF
The US Treasury led the rescue effort and discovered a few things in the process.
What the Fed soon discovered was that South Korea “had played games with those reserves,” quietly having sold or lent most of it to its commercial banks, which used them to shore up bad loans, Greenspan said.
The IMF bailout required the cooperation of South Korea’s then-newly elected president, Kim Dae-jung, whose first major decision was to commit to stringent economic reforms, he said, while the Treasury and the Fed reached out to the world’s largest banks to not call in their Korea loans.
“A default by a nation of Korea’s size would almost certainly have destabilized global markets,” Greenspan wrote. “Shell-shocked investors would have withdrawn not just from East Asia but from Latin America and other emerging regions, causing development to stall.”
Hopefully, history won’t repeat itself in terms of the financial crisis. However, after the reading the above article, I can’t help but notice a familiar pattern here.
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My senior thesis was on the East Asian Economic Crisis. It was essentially caused by byzantine lending policies that were brokered by the government. It happens in developed countries as well as developing countries. Remember the S&L crisis of the late 80’s and early 90’s? The main difference is that an economy as large and developed as the U.S. is not going to create an investor panic and cause them to call their short term loans.
That’s what essentially happened in East Asia. Lots of loans propping up non-performing debt. Companies that should of never qualified for the loans were helped by the government to get them. Foreigners joined the feeding frenzy by offering short term, lower interest loans as short as one year, renewable every year. However, when the Won, Baht and Rupiah went to hell in a hand basket, this immediately made these foreign loans more expensive because the interest payments HAD to be paid in dollars, yen or deutch marks.
What happened in 1997 cannot happen today (at least not in the same way) because Korea foreign currency reserves stand at $255 billion and external debt (i.e foreign debt) stands at $170 billion (both short and long term). An excellent and very healthy ratio. I think in 1997 South Korea had $25 billion in foreign currency reserves but over $64 billion of external debt short term debt, a pretty shitty ratio. It’s no wonder that the final IMF bailout package was very close to the total amount of short term debt at $57 billion.
Finally, I have to say that the average Joe Korea’s response to the bail out package as pretty childish and unsophisticated. Strikes, yelling and screaming, blaming the IMF, blaming Kim Young Sam, etc. There wasn’t much Korea or the Kim administration could do. It was the business and government practices over 30 years in Korea that caused the crisis and Kim really had nothing to do it with. It took courage to sign that bailout package. I don’t understand why Korean society blames Kim.
Now, the conditions and concessions that the IMF package requested from each of the crisis striken nations is debated. Was it too onerous or not? Personally I don’t think so and it forced each of the countries to make fundamental changes to their economic and business practices that were for the better and makes another economic crisis much less likely to happen.
What familiar pattern have you noticed?
Interesting summary of the ‘IMF Crisis’ WangKon. Thank you.
Mins, familiar pattern? Sorry, it’s too late and I’ve had too much wine.
#2,
Can you clarify what you mean by familiar patterns? In Korea or in the other nations (i.e. Thailand, Indonesia).
excellent post!
I assume familiar patterns meaning that banks/investors/lendors are too loose with lending and sooner or later it all comes crashing in?
I’m assuming the general “madness of the crowd” sort of thing.
At the time of so-called “IMF crisis” as korean people termed it, I used to be very unsympathetic to the “IMF” demonstrators. But now that I’m a bit older and things like job security is no longer an abstract concept, I’m a lot more sympathetic.
The real problem during that time is that the demonstrators always link their plight to “foreign devils.” It was more so with Mahathir, but IMF demonstrators also blamed wrong people. Kim Yong Sam… was he at fault? I have no idea. It’s sort of like Bush Sr. losing re-election because of Hurricane Andrew and the economy. I do remember when the crap hit the fan in Korea, Kim Yong Sam ran to Bill Clinton for a bailout and he in turn shoved him towards IMF. If my memory serves me right, KYS is pro-US sort of guy. I doubt that Japanese central bank would have done something else of KYS was pro-Japan… but what do I know… Alan Greenspan says otherwise…
Wangkon 936, Ditto to Snow’s #3. Great comment! Hope you’re right about it not happening that way today.
Thank you, virtual wonderer
Hmmm…I’m surprised no one has picked it up considering that the familiar pattern that I was refering to is a recurring theme in this blog.
Anyways, I was refering to S. Korean foreign policy in terms of relations with Japan and the U.S. From the article above, KYS dissed Japan, but when the thing hit the fan, the first nation that he turned to for help was the nation that he dissed. OK, the Japanese banks might have been reluctant to delay the loans considering the risks, but even if they were willing to overlook them, I don’t think KYS’s remarks would have helped. That and Greenspan’s account that the U.S. Treasury and the Fed convinced banks around the works not to call on the debts. Although it was the IMF that took the lead in bailing Korea out, the U.S. also did its part in bailing out S. Korea after it played fire with its finances.
FF to the year 2007. We have a president whose words and actions in some ways resemble KYS, and who has been dissing both Japan and the U.S. At the same time he is playing with fire in terms of security and stability of the Korean peninsula, by pursuing a no questions asked policy regarding N. Korea. Now will this hit the fan? Well only time will tell. But if it did and S. Korea does get into hot war by the end of the year, I wouldn’t be surprised if the first nation that Roh turns to for help is the U.S.
My experience from most Koreans(my adult students) is that they like Alan G. I had thought when I heard the book was coming out that they would use it against America and Bush since he also supposedly critizes Bush’s policies.
Now, I wonder if they will even sell the book in Korea?
# 6,
There are two major indicators that point to a nation’s vulnerability to a financial crisis. One is the previously mentioned ratio between external (i.e. foreign) debt vs. foreign currency reserves and the other is the current account deficit. The current account deficit is essentially a nation’s trade balance plus its net capital inflow/outflow. In other words, the nation’s net borrower or a net lender status plus whether or not it’s a net exporter or a net importer. Hope that makes sense.
Back in the so-called “Tequila crisis,” otherwise known as the Latin American Economic Crisis of 1994, which foreshadowed the East Asian Crisis almost perfectly, there was a sharp rise in the current account deficits (”CAD”) of the Latin American countries before their currencies tanked. I’d need several pages to demonstrate the link between CAD and economic instability, but I think it’s sufficient to say that your CAD essentially points to the fact that you are buying too much stuff overseas and you don’t have enough money to do so internally so you are borrowing overseas to buy overseas. What does this do to your currency? It essentially tells the world economy that you have no faith in your own currency and that’s why you are borrowing so many dollars, yen or Euros to feed your appetite for foreign goods. It is also a measure of how much value-added products your nation produces. So if you have current account surpluses, such as China (10 years), Japan (20 years) and until recently Korea (10 years until this year), that means you are not only making some good shit that people all around the world love to buy, but it also means you are a net lender, not a net debtor.
Thus, currency speculators (i.e. George Soros) want to make a quick buck in the currency futures market and basically make the bet that the peso, won or baht isn’t worth what it should be so they start dumping those currencies in the world markets. Okay, so Thai or Mexican governments say that one baht or peso is worth this many dollars? Here is a baht or peso on the open market, who’s willing to give me X amount of dollars for it? Ah, this is one of the reasons why governments have foreign currency reserves. So when the George Soros of the world starts throwing around baht or pesos on the open market, the Thai and Mexican government can go buy them up to show the open market that it is worth what it is worth. Ah, but the crafty Mr. Soros knows that their defense is not sustainable so he just keeps dumping baht and pesos until Thailand and Mexico run out of reserves and he makes a killing (and I mean an absolute killing) in the currency futures and options markets.
So, going back to just how unlikely a financial crisis in Korea would be, Korea’s got great foreign currency reserves to 1) defend their currency from speculator attack and 2) pay off short-term external (i.e. foreign) debt and they have a great CAD situation with 10 years of surpluses and a slight dip (I think at only a magnitude of $2.9 billion) this year. Nothing short of a global meltdown will cause a crisis in the proportions of 1997. However, descent growth in the Korean economy is another matter and a recession is possible if overseas markets slowdown.
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