US Credit Crunch Hits South Korea

A rag-and-bone merchant pulls his cart in Seoul, South Korea. Large emerging nations have come under pressure in the global financial crisis as foreign investors withdraw their money (Lee Jae-Won/Reuters)
The US Economic troubles without borders since it has been spreading across the country, from Argentina, Canada, Iceland, Britain, Hungary, Ukraine, Pakistan, India and South Korea. Emerging markets around the globe have come under simultaneous pressure from the financial tsunami that started in the United States mortgage market.

South Korea is a major industrial power, whose $960 billion economy was the 13th-largest in the world last year and it differs from South Korea to Iceland in its immunity from global economic impacts. Economists have been hoping that demand from South Korea and Asian neighbors like China and India could replace some of the lost global demand from slowdowns in the United States and Europe. The biggest concern is that the global credit crisis could cripple South Korea’s banks, which rely more heavily on overseas borrowing than China’s or Japan’s.

South Korea's economy is vulnerable to Western market panic and destabilization because it is more transparent and open to foreign capital than those of neighboring Japan and China, who have so far survived the credit crisis unscathed. South Korea’s vulnerability is an indication that the global financial crisis has reached a new level.

As global credit markets have dried up, South Korean banks have scrambled to find dollars to repay maturing foreign-currency loans. Woori Bank, one of South Korea’s largest lenders, suddenly found itself unable to borrow dollars after last month’s collapse of Lehman.

Worse, foreign banks refused to roll over many existing loans, forcing Woori to repay them as they came due, also in dollars.

With the bank using as much as $280 million of precious foreign currency a week, Woori has stayed liquid by dollars loans from the government, which has pumped tens of billions into banks. the government responded by pledging more than $100 billion in loan guarantees and an infusion of $30 billion in American dollars to prop up the Korean banking system. The government said the additional liquidity should help Korean banks repay or roll over the banks’ $80 billion in foreign currency loans that will come due by June 2009.

International Banks would not lend to South Korea's Banks because of their own liquidity problems. According to the Bank of Korea, foreign investors have been leaving South Korea since subprime problems first hit last year. In the first six months of this year, net foreign direct investment in South Korea turned negative for the first time since 1980, when such figures started being kept, as foreign investors withdrew a net $886 million.

The real problem is that developing economies do not have the same access to emergency sources of foreign currency funding that the United States and a few developed countries have, and are thus left unfairly to the mercies of global financial markets.

Related Posts :

1. Four Currency Crises: Hungary, Iceland, Pakistan, and Argentina
2. Argentina crisis could have global impact
3. Iceland receives $6 bln rescue package
4. Nouriel Roubini: How to prevent contagion effects of the financial crisis in Hungary
5. Will Hungary be the next Iceland?

Sources :

The New York Times: Trouble Without Borders, October 23, 2008

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