Posted October. 11, 2008 23:57,
Korea Headed for Black September
The Times of London said Sept. 1 that Korea was likely to face a financial crisis amid rising foreign debts, citing that most Korean bonds were to mature in September while foreign exchange reserves remained low.
The market was sensitive the first day of September because of the black September rumors.
The report fueled uncertainty in the Korean market. The won fell 27 points against the dollar Sept. 1 from Aug. 29 (1,089 won or 79 cents) and dropped 59.5 won (four cents) over the following three days. The three-year Korean government bond yield rose from 5.77 percent Aug. 29 to 5.97 percent Oct. 2 after the news report.
The crisis never materialized, however. There was no bond maturity problem and no change in the foreign exchange amount. The real crisis began 10 days later not in Korea, but on Wall Street and spread throughout Europe including the United Kingdom.
When the Korean government announced a stricter five-percent rule in April 2005, foreign funds complained that the government forced investors holding more than five percent of corporate stocks to unveil the purpose of their investment and disclose the source of money and stockholders if they wanted management control.
The Financial Times criticized the rule, calling it a schizophrenic measure that does not match (Koreas) financial hub policy, economic nationalism, and a measure intended to regulate foreign investment.
The five percent rule, however, had already been active in the United States and the United Kingdom had a three percent rule. Experts blamed foreign media and speculative capital for intentionally shaking up Korea.
The British daily also ran an article that foreign investors shunned Korea after the Korean alcohol giant Jinro was acquired in April by Hite Beer Consortium, not by a foreign buyer.
Foreign media are now playing up Koreas financial situation, raising the prospect of another crisis in the country. The government refuted the argument in a news release, but worry is growing over the vulnerable Korean market in the wake of the U.S.-led financial crisis.
In response, the government and financial experts say foreign media often suppose an extremely unrealistic scenario or exaggerate reality.
Others, however, say Korea must check for weaknesses in its economy so long as their arguments are not unfounded.
○FX reserves to repay foreign debt
Foreign media are paying attention to the amount of Koreas foreign reserves and volume of foreign debt, raising doubt over the countrys ability to repay external debts.
At the end of September, Koreas foreign reserves amounted to 239.7 billion dollars and external debt 419.8 billion dollars. At a first glance, the debt figure exceeds the amount of foreign exchange reserves.
Korea, however, has lent 422.5 billion dollars to other countries, 2.7 billion dollars more than it owes.
Moreover, the government and the Bank of Korea say the real debt is 261.2 billion dollars if debts Korea need not repay for a while are subtracted. This includes 151.8 billion dollars in debts that can be repaid over time including the cost of currency hedging for shipping companies, export prepayment, and loans of foreign investment companies, and the foreign purchasing funds of national and monetary stabilization bonds worth 51.8 billion dollars that are paid in won, not in dollars.
○Households ability to repay debts
The Financial Times said private debts accounted for 180 percent of Koreas GDP. In June, individual debts amounted to 781 trillion won (568.8 million dollars), up 2.8 times from 276 trillion won (201 million dollars) immediately after the 1997 financial crisis. The individual debts made up 81.3 percent of GDP, up from 56.2 percent over the same period, but hardly near the Times figure.
Assets, however, must be also considered in valuing the health of household debts. The combined financial assets of individuals including savings and stock investments were 2.22 times larger than financial debts in June. Financial debts took up 45 percent of financial assets. Banks said the delinquency rate of household lending was only 0.6 percent at the end of July.
The danger is asset deflation stemming from a decline in stock prices because lower asset values mean a reduced ability to repay debts. The government, which is worried over the negative effects of asset deflation, is considering a tax credit for long-term funds to boost the stock market.
○Controversy over loan-to-deposit ratio
The Financial Times and the International Herald Tribune cited Korean banks high loan-to-deposit ratio (a banks loans divided by its deposits), which forces banks to resort to foreign capital for lending, as a reason for the liquidity crunch.
The Financial Services Commission said the majority of won-denominated loans worth 837 trillion won are financed by won-denominated funds worth 973 trillion won. Korean banks also do not borrow money to finance their lending from overseas sources.
Experts say Korean banks are healthy according to the ratio of the Bank for International Settlements, so citing a high loan-to-deposit ratio as the cause of Koreas weak financial health is malicious. The commission also said Koreas ratio of 105.4 percent is lower than that of U.S. banks (112 percent).
Korea has a negative track record from the financial crisis and its foreign exchange market is vulnerable relative to the size of its economy. Thus its unfairly treated, said an executive at a Korean commercial bank who previously worked for a foreign investment bank for a long time.
The government must set up mid- to long-term measures so that the won can serve as an international currency by signing currency swap agreements with major economies.