 |
Financial woes keep South Korea in turmoil
South Korea's fourth-largest brokerage filed for bankruptcy Friday Analysts say nation giving mixed signals
December 12, 1997
Web posted at: 2:41 p.m. EST (1941 GMT)SEOUL, South Korea (CNN) -- South Korea's financial frustration rose to a new level Friday. The nation witnessed the failure of its fourth-largest brokerage firm, the sinking of the stock market to a 1997 low and another record low for the won.
Compounding the concerns is the prediction by brokers and analysts that the nation will see no positive change in its financial situation until after the presidential election on December 18.
"I think there is an overall crisis of confidence, and in the immediate term, let's say up to the elections next week, many people feel that the actual amount of money that is going to come into Korea isn't enough," Milton Kim of Ssangyong Securities told CNN.
The nation's lame duck government, led by President Kim Young-sam, has sent an array of mixed signals about its financial situation, causing investor confidence to plummet.
And, candidates are playing up the humiliation felt by South Koreans for receiving a $57 billion economic rescue package from the International Monetary Fund (IMF). Concerned, the IMF asked the three leading political candidates to submit written guarantees that they would abide by the deal.
News of Dongsuh's plight helped send the stock market into another free fall The candidates complied, but the leading presidential contender still took out front-page newspaper ads vowing to renegotiate the deal if he wins. Under pressure, the candidate, Kim Dae-jung, reversed his position on Friday.
Observers say replacing the powerless government is key to getting South Korea's finances back on track.
"A lack of political leadership in the lame duck government is the most serious problem that Korea faces," said one local foreign exchange bank dealer. "Who will dare to say 'I will assume the responsibility?'"
For the people, the instability is giving way to panic.
When the fourth-ranked Dongsuh Securities collapsed on Friday, investors raced to withdraw millions of dollars.
"I really feel how bad the economy is," one South Korean told CNN. "When they used to talk about early retirement, it didn't seem to be my problem. But now, I worry about what will happen to me."
"I'm really beyond frustration," said another. "My stock investment has shrunk so much in the past year there is not much left anymore."
Friday's free fall
Seoul's key stock index hit its high of 799.54 earlier this year. It shed 7 percent Friday to close at 350.68.
"There are no rules applying to the market right now," said Park Young-chul, the chief trader for Hyundai Securities.
Bonds took a beating too, as benchmark yields on three-year corporate bonds rose by 178 basis points to close at 24.68 percent, up from 22.90 percent. The Korea Stock Exchange said international investors bought only $700,000 in corporate bonds. The market had hoped to attract some $4 billion in non-Korean funds in December under new rules that took effect this month.
"Why would they buy? The country itself faces default, the won loses its value by 10 percent every day, and nobody has great credibility with bank guarantees," said Casey Choi, a trader at Indosuez W.I. Carr Securities.
For the fourth day this week, the Korean won fell beyond its permissible trading limit, nose-diving to a record low of 1,891.4 per dollar at the market's opening. Thanks to intervention from the central bank, the won closed at 1,710.0, but analysts say it could reach 2,000 against the dollar by next week.
The currency has already lost 55 percent of its value against the dollar this year.
To ease the nation's cash crunch, the Korean cabinet on Friday said it would lift controls on long-term overseas borrowing by private businesses, state-run companies and provincial governments. It also ordered the central bank to extend $6.3 billion in special, low-interest loans to needy banks, securities firms and investment trust companies.
But many dealers question whether the central bank can prop up the economy, even temporarily.
The credibility crisis
Brokers say a cloud of distrust hangs over Korea's financial woes. For that, analysts blame the government.
"This is a credibility crisis," said Yoo Tae-hou, managing director at Seoul's Daewoo Research Institute. "Foreigners wonder if they can trust South Korea, if they can trust its ability to deal with its problems, if the country will play by the rules."
The trouble stems from a variety of mixed signals sent by the government.
Among them:
- When the IMF was putting together its rescue package, South Korea reportedly overstated its international currency reserves and understated the amount of its short-term international debt. But according to The Associated Press, by the time the government turned to the IMF for help, it had only $6 billion in foreign exchange against short-term debts of $80 billion.
There is a rumor that Kim Young-sam wasn't aware of the full extent of the financial situation until a November 28 phone call from President Clinton, who called to say the nation was a week away from insolvency. Government sources reportedly say that rumor is "very convincing."
- Under the terms of the bailout package, South Korea promised the IMF it would clean up its financial mess. But the government is funneling about $2 billion into two troubled commercial banks to keep them afloat.
Investors say speculation that the government isn't being honest about the situation only makes the situation worse.
"It's hard for creditors to know for sure what the financial situation has been and what the policies are," said Vincent Truglia, managing director of Moody's Investors Service Inc. "When you have that confusion, it doesn't help you to get out of the crisis of confidence."
Truglia suggests a debt moratorium could be in South Korea's future.
Meanwhile, a South Korean newspaper reported Friday that the IMF is scheduled to hold an emergency board meeting on Monday to discuss advancing the payment schedule for the nation's loans.
"The IMF has decided that South Korea's short-term debt problem is more serious than estimated," the Chosun Ilbo quoted a finance ministry official as saying.
Correspondent Sohn Jie-Ae, The Associated Press and Reuters contributed to this report.
Related stories:
- South Korea, IMF try to finalize economic bailout - December 2, 1997
- Economic jitters as South Korea's presidential race begins - November 26, 1997
- With IMF bailout, South Korea braces for belt-tightening- November 22, 1997
- CNNfn: South Korea seeks $20B - November 21, 1997
- CNNfn: S. Korea props up currency - August 26, 1997
Related sites:
Note: Pages will open in a new browser window
- International Monetary Fund (IMF)
- Korean Ministry of Finance and Economy
- Association of Southeast Asian Nations (ASEAN)
- ASEAN focus group-- advice on doing business in ASEAN countries
- Asia-Pacific Economic Cooperation forum (APEC)
- Korea Herald
External sites are not endorsed by CNN Interactive.
|
Sound off on our message boardsYou said it... |
|
© 1997 Cable News Network, Inc.
All Rights Reserved.