South Korea's mainstock index, the KOSPI, dipped to its lowest point in a year and a halfthis week, amid worries over a string of major bank failures in theUnited States, including the collapse of Lehman Brothers, one of thecountry's largest investment institutions. South Korea's currency, thewon, plunged against the dollar as central banks around the worldpumped $180 billion worth of cash into credit-starved markets.
SouthKorea's economy is the world's 12th largest, and depends heavily onexports, especially to the United States. That makes this countryextremely vulnerable to international crises but it has also helpedSeoul build up substantial reserves of U.S. dollars as a cushionagainst turbulence.
South Korea's finance minister said thisweek the country has enough reserves to inject into the market asneeded. However, some economists note Seoul's reserves have dropped bynearly ten percent since March, and may not be sufficient to deal witha protracted period of crisis. Lee Seong-tae, governor of South Korea'scentral bank, warned lawmakers this week it remains what the impact ofthe global crisis will be.
Koh Yu Seon is an analyst with DaewooSecurities here in Seoul. She says the current meltdown on Wall Streetclosely parallels the economic crisis South Korea and Asia experiencedin 1997.
She says American investment banks have made excessiveloans, which created a real estate bubble and made the lendersinsolvent on bad debt. That, she says, is similar to what happened inSouth Korea, where enterprises borrowed excessively to chase badinvestments.
Many South Koreans refer to that period in commonspeech as the "IMF crisis, in reference to the International MonetaryFund, which, with U.S. support, loaned South Korea about $20 billion, but, as Koh recalls, imposed austere conditions that limitedthe country's economic flexibility.
She says, the U.S. viewedbankruptcies as inevitable to get rid of inefficiencies and solve SouthKorea's financial problem. We had a chain reaction of them here, sheadds. But now, she says the United States is taking a completelydifferent set of actions because it wants to avoid paralysis of theentire financial system.
U.S. officials draw a distinctionbetween the $20 billion IMF bailout of South Korea and Washington'smore than $250 billion bailout of U.S. financial institutions. U.S.banks and insurers do business all over the world, and their problemscan rapidly spread to the global entities that are exposed to them. Bycontrast, the negative influence of South Korean bankruptcies wasconfined mainly to Asia.
Many ordinary South Koreans view theIMF rescue period as a humiliation imposed on their nation fromoutside, but the country paid back the loan and recovered far morequickly than many expected. Still, economists warn if Washington doesnot draw a line in its rescue of faulty lenders, it could losecredibility in preaching tough free market medicine abroad in thefuture.