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Focus
South Korea Back on the Development Track
SME WORLD Desk
Jul 2009
Jul 2009
Page 1 of 2
Are the lessons of the 1997 Asian financial crisis applicable in today's broader global context? Clearly we are still grappling with the effects of a weak global economy. The credit crisis, triggered by the subprime mortgage meltdown in the US, produced devastating repercussions. However, the unprecedented crisis mandated unprecedented international collaboration. To this end, Governments of major economies worked tirelessly to contain and stabilise the dramatic fluctuation in the global financial system.
Specifically, we came together at the G-20 summit meetings. We first met in Washington, DC, last November, then in April in London and the G-20 will meet again in New York in September. These efforts resulted in several important fiscal and monetary measures. Financial commitments included $1100bn to various programmes to improve finance, credit, trade, investment and overall economic activity. Nearly 10% was allocated to assist international development banks in continuing to lend to impoverished countries. An agreement was also reached on broader global regulation of hedge funds and credit rating agencies.
Emphasising co-ordination
As a member of the G-20 troika and the chair of the G-20 in 2010, South Korea has taken an active role in harnessing global financial cooperation and market stabilisation. The government has emphasised, on several occasions, the importance of policy co-ordination among economies of the world, including close consultations with neighbouring countries such as China and Japan. One such measure includes drawing out the Chiang-Mai Initiatives which helped to resolve the liquidity shortage of Asian countries.
In looking at the lessons learned from the Korean experience in the global financial crisis, it was difficult for us at the outset to accurately assess and predict the impact of the US subprime mortgage crisis in Asia. For example, derivative products were less developed in Asia. As of 2008, over-the-counter derivative assets accounted for only 6% of Korean banks' total assets, much lower than the 27.7% exposure of US banks.
We thought at the time, due to financial sector decoupling in Asia, the impact of Lehman Brothers and other investment banks would not be too significant. On the contrary, Korea, China and Japan all suffered dramatic market declines. Korea was particularly vulnerable because of its reliance on the US dollar for external payment settlements. For the first couple of months following the Lehman bankruptcy, Korea's policy priority was set on stabilising the foreign currency market. Korea at the time had sufficient foreign reserves, $243bn. Solvency was not an issue because its foreign debt structure was far healthier than it was at the time of the Asian financial crisis in 1997.
Even with this backdrop, the 'stigma effect' from the 1997 crisis, combined with Korea's substantial dependency on foreign trade, caused grave concern among investors. Instability in the currency market was believed to be inevitable.
To assure investors, our government launched a campaign to disseminate information on the key differences between the crises Korea faced in 1997 versus 2009. Contrary to our expectations, we did not see any immediate positive outcome of this initiative to restore confidence. The situation changed, however, when the currency swap agreement with the US was signed in October 2008. At that point, the central bank began to guarantee the foreign debt of commercial banks. We then began to see some positive signals. Korea's foreign exchange market regained stability.
In retrospect, convincing the world that Korea had fewer domestic financial problems than in 1997 was also crucial to recovery. At the same time, the Korean government also had to act quickly and decisively to ward off global stagnation from affecting the real economy. The Bank of Korea responded boldly through drastic interest rate cuts while providing sufficient liquidity at the same time. We saw sharp reductions in loans to small and medium-sized enterprises (SMEs) and to contain further liquidity shortages the government introduced further measures.
We extended credit guarantees on all SME loans through the public fund, Korea Credit Guarantee Fund, and this restored the primary function of Korea's commercial banks as liquidity suppliers to the real economy. Additionally, the government introduced a Won20, 000bn ($16bn) bank recapitalisation fund. This endeavour was combined with a separate Won40, 000bn fund to purchase non-performing loans from financial institutions. Thus, while the advanced countries simply provided liquidity and waited for it to take effect, our policy approach was more tailored, focused and proactive. This response was possible because, unlike 1997, the current crisis was created externally while Korean banks were sounder financially.
1 Comments >>
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