Title: Korea's Financial Crisis: Causes and Restructuring Tasks
Abstract: This paper deals with the sources of Korea's financial crisis and restructuring of banks and corporations. The contagion effect, worsening current account, weakening finance of banks and corporations, large external debts and the small amount of international reserves provided conditions for a speculative attack on the Korean won. The existing financial institutions and supervisory agency did not fit well in the era of global capital markets. The crisis is an evolving process of Schumpeterian destructive creation, which brings in a sound institutional basis for better economic performance. The corporate's high debt to equity ratios resulted from the belief that the government would not permit companies to fail. Excessive lending by banks and little attention to the quality of their loans were a result of industrial policy. Improving the balance sheets of banks and corporations determines whether the end of the present crisis is sustainable. JEL Classification: F3; Key Words: Korea, Financial Crisis. INTRODUCTION Korea has long enjoyed high savings and investment rates. The Korean economy was tightly integrated into the world markets. The globalization of the Korean economy and high investment rates brought with them rapid economic growth. Over the last 30 years, Korean per capita income has risen by one hundred twenty five times over what it was in the early 1960's. The Korean economy began to experience a financial crisis in late 1997. The request by the Korean government for a three-year stand-by credit from the IMF was approved on December 5, 1997. The public as well as the professionals are inquiring into the causes that led to such a crisis and what steps need to be taken to overcome the crisis. This paper deals with issues relating to the crisis, with special attention on the origin of the crisis and restructuring of banks and corporations as a step to reduce the structural weaknesses of the economy. Following the Introduction, Section 2 sketches the sequence of events in the Korean crisis. Section 3 summarizes the causes of the crisis. Section 4 covers the origins that led to the weak balance sheet conditions of banks and the corporate sector. Section 5 examines measures undertaken to restructure the banking and corporate sector restructuring. Section 6 concludes with a few remarks. SEQUENCE OF EVENTS LEADING TO KOREA'S CRISIS This section sequentially summarizes the major events leading to the Korean financial crisis. The signs of a financial crisis began in January 1997 when the Hanbo business group, a chaebol, became insolvent. Since then, there have been consecutive failures of Korea's business conglomerates - Sammi Steel in March, Jinro in April, Daenong in May, and Kia Motors in July. Non-performing loans of commercial banks and merchant banks rose. From June 1997, Korea was faced with a banking panic, partially due to rising non-performing loans. As financial crises started in ASEAN countries in July 1997, the exchange rate weakened and interest rates 7tarted to rise in August 1997. This signaled the beginning of an exchange rate crisis in Korea. Capital flowed out, resulting in a decline in Korean stock prices. In October, Moody and S&P lowered the credit ratings of the commercial banks. At the end of October, international reserves and disposable reserves were down to $30.5 and $22.3 billion, respectively. International reserves were rapidly depleted in November and December. On November 21, the government announced that Korea would seek the IMF's assistance. Finally, on December 5, 1997, the Korean government and the IMF reached an agreement on a bailout plan. CAUSES OF THE CRISIS Many studies described the causes of the financial crisis in Asia and Korea. They were several: First, Korea has a high degree of dependence on Pacific Rim countries through trade and capital flow channels. The financial crises in the Southeast Asian countries generated an expectation that Korea's exchange rate would depreciate. …
Publication Year: 1999
Publication Date: 1999-10-01
Language: en
Type: article
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Cited By Count: 4
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