Seoul struggles to silence crisis talk

The Times
November 11, 2008

Seoul struggles to silence crisis talk
Leo Lewis in Seoul

In a desperate attempt to shore up public confidence in its failing economy, the South Korean Government has moved to a “wartime” footing last seen in the days of the Asian financial crisis of 1997.

Commentary: As I remember it President Kim Young Sam overwhelmingly blamed ajoshis and adjummas for the crisis, taking too many holidays abroad and sending their children to too many foreign schools. Korean banks were noticeably absent from his trial without jury attributions.

As economists at the LG Economic Research Institute in Seoul told local media that the country was vulnerable to economy-led trauma, adding that a significant drop in GDP growth would “invite a surge in suicides and divorces”, the Government tried to reassure the public that South Korea's banks and large companies were in a much better state than they were a decade ago, backed by a prodigious stash of foreign reserves.

Commentary: We can only hope that most of those suicides kill themselves first? That prodigious stash is dwindling by the day though luckily not at GM's pressure bleed rates.

Public recollections of the Asian slump of a decade ago are still raw and Koreans are jittery at any sign of history repeating itself, reopening the country's deepest wound.

Commentary: Korea's deepest wound: to be found in debt and beyond its own national control.

President Lee reiterated the claim: “Right now,” he said, “the situation is fundamentally different ... and I can tell you for a fact: Korea will not have another financial crisis.”

Commentary: What kind of crisis is Korea having at this time?

Yet the Government's efforts may be overwhelmed by events: the country's banking system is beginning to look increasingly fragile, its credit bubble is at risk of deflating uncomfortably fast, the reserves are shrinking quickly and economists have started to downgrade South Korea's growth prospects.

Commentary: In times of downgrading of "the golden straight-jacket" promises mean nothing and only remedial actions which lead to foreign investor confidence are required. Now what are the best policies to put in place? Or does Korea have a crisis of reputation to deal with?

Seoul is also faced with challenges beyond its control: consumers in the United States are buying fewer electronics and cars; and the global shipbuilding industry, in which South Korea excels, is at risk from order cancellations as shipping rates plunge.

Commentary: Is it realistic to blame foreign customers in the USA for Korea's banking and credit bubble woes when in fact, the reason they are incapable of buying Korean products at this time is because they are: over-leveraged, under-capitalized, asset-poor, in bankruptcy and possibly unemployed all virtually at the same time?

Analysts at UBS believe that growth in South Korea will slow to 1.1 per cent in 2009, which would mark only the third time since the nation began to industrialise in the 1950s that its growth rate has sunk below 3 per cent.

Commentary: How reliable are UBS reports at this time? "The U.S. tax investigation risks compounding damage to UBS's reputation at a time it has been forced to make bigger writedowns than any other European bank in the credit crisis." Indictments possible in UBS inquiry: report

Added to the Government's headache is the very high level of private sector debt, which hit 180 per cent of GDP in the second quarter of this year and is higher than in America. That debt, analysts say, is going to start to unwind soon because of slowing employment and wage growth. Capital adequacy ratios at Korea's largest banks are also under closer scrutiny as they dwindle towards recommended minimum levels.

Commentary: President Roh appears to have perhaps spent more government money than nearly all previous heads of state combined?

Jae Ha Park, of the Korea Institute of Finance, argued that at the heart of the psychological battle were South Korea's large foreign reserves, which stand at $212 billion (£135.8 billion). That is $27 billion lower than they were a month ago, but still among the largest in the world. He said that they were a carefully positioned psychological tool to persuade the public that the country would not run out of dollars again.

Commentary: Why did the central bank wait over a year to adjust interest rates? Why has the monetary policy appeared piecemeal? What rates of repurchase of those US dollars have been represented by Korean banks attempting to shore up their own local reserves while depressing the won further every time the central bank releases a palette?

When the Asian financial crisis broke, ordinary Koreans could not understand how their country, which appeared to be highly prosperous, could suddenly run out of foreign currency. In astonishing scenes, Koreans rallied round, selling their gold and jewellery to help with the national drive to raise dollars. When the IMF stepped in to rescue the situation, it dealt a massive blow to national pride.

Commentary: How much of Korea's IMF-led reforms policy was lip-service to the debt and how much of Korea's national pride over IMF dictates affect Koreans interpretation of contract consideration? How many Korean companies have fully transparent accounting procedures? Korea's latest credit rating downgrade should have been forseen and is dependent on foreign investor confidence. The FDI flight has been/had been taking place a long time prior to the US mortgage crisis. What should be done, who should come forward with transparent business practices and how should leaders ameliorate Korea's seeming toxicity to the global financial world? Are former Enron executives roaming around on presidential pardons?

In a severe knock yesterday to the Government's efforts to talk-up the country's underlying financial health, Fitch, the ratings agency, downgraded its outlook for South Korea from “stable” to “negative”.

Commentary: Talk is cheap. Let's see financial reforms that separate the wheat from the chafe. Let's see Korea's financial and leadership really walk the global walk which attracts and increases foreign investment and reassures and calms said investors. Would this be the walk?