Korean Financial Crisis
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The document summarizes the 1997 Korean financial crisis. It discusses the background leading up to the crisis including growing foreign debt levels. It then examines the causes such as declining exports and a vulnerable financial system. The consequences included corporate and bank failures, high unemployment, falling GDP and currency depreciation. In response, the Korean government and IMF implemented plans including bank closures and economic reforms. Lessons highlighted were the need for sound financial regulation and independence from political influence.
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Korean Financial Crisis
- 1. Prepared By: Amar Ranu (90 Deepak Thakkar (909) Dhananjay Rakesh (917) Rohitesh Hote (927) Under the Guidance of : . . . . Korean Crisis of 1997 Welcome
- 2. Synopsis Causes Consequences Response Indian Context Background Events Series External Causes Internal Causes Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 3. Synopsis Causes Consequences Response Indian Context Background Events Series External Causes Internal Causes Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 5. Synopsis Causes Consequences Response Indian Context Background Events Series External Causes Internal Causes Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 7. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 10. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 14. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 16. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 18. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 21. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 23. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 24. Consequences GDP: 1980 to 2008
- 25. Consequences GDP: 1980 to 2001
- 26. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 28. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 31. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 34. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 36. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 38. Synopsis Causes Consequences Response Indian Context Background Events Series External Factors Internal Factors Crisis Corporate Failure Bank Failure Unemployment Debt GDP Exchange Rate Government IMF Analysis Contents Criticism Conclusion
- 40. Prepared By: Amar Ranu (903) Deepak Thakkar (909) Dhananjay Rakesh (917) Rohitesh Hote (927) Under the Guidance of : Dr. S. K. Ghosh . . . . Korean Crisis of 1997 Thank You
Editor's Notes
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- BACKGROUNDKorea also known as South Korea or Republic of Korea was established in 1948.From the early 1960’s to 90’s, like many other Asian countries, Korea experienced high growth rates and rapid industrialization.They focused on production goods to export to highly industrialized nations as a main part of their growth.In 1996, Korea became the second Asian country (after Japan) to be a member of the OECD (Organisation for Economic Co-operation and Development). It consists of thirty countries that accept the principles of representative democracy and free-market economy. Most members are high-income economies and are regarded as developed countries. Membership into organization furthered Korea’s growth.In addition to their high growth, Korea worked to improving education at all levels, from elementary to university system. Korea was relatively poor during the 60s, but was labor abundant. Cheap labor and educational reform = cheap and more productive workforce.
- Series OF EVENTS ’95-’96- Although some say that a current account deficit is tied to a crisis, Korea’s CA deficit rose to 5% from 2% in 1996- Rate of exports fell from 31% to 15%- GNP declined from 14.6% to 7.1%- Foreign debt rose from 78 billion (62% of exports) in 95 to 100 billion (76% of exports) in 1996.
- EXTERNAL FACTORSMany economists argue that small and open economies are vulnerable. Although Korea is not necessarily considered small, it is very open. It is export driven to many industrialized countries and recent member of the OECD. Open economy = more vulnerable to price shocks, such as the price of oil and the overall growth of international trade (entire East Asian Crisis affected many neighboring countries)Korea could not adjust to the slowdown of exports and decline in economic growth. It began to increase foreign borrowing to maintain growth of GNP and exports. Also used the money to bailout failing corporations. International financial system was deficient and had little supervision. Lead to overoptimistic risk assessment = overlending, huge withdrawls of foreign currency that takes effect immediately.Corporate failures which spilled over into the banking sector since they were closely intertwined as we will talk about later.
- I will talk about the cause and factors of the crisisKorea loss its competitive edge for many reasons.Korean’s Won was relatively over appreciated in comparison to the Japanese yen so it made it difficult to sell there exports. The technology boom around the world, including China which sells computer chips for cheep, it is difficult to compete with such high appreciated currency.It was also difficult to compete with the other Asian and Japanese markets in cars, clothing etc.Overall, these impacts affected over 50% of Korea’s exports.In Korea the biggest business groups form a chaebol.The Korean word chaebol means \"business group\" or \"trust\" and is often used the way \"Big Business\" is used in the US.The corporate and bank failures were due to corruption which I will talk about in the next three slides.
- In Jan 1997 10,000 firms defaulting on paymentsListed here are only a few of the largest Corp in Korea that have filed for bankruptcyIn late 1997 the Won’s value fell by 50%Korea asked for IMF help which received $20 billion by the end of yearS&P gave Korea Junk bond status when the IMF forced Korea to show there true external reserves in Dec. and they received that grade because it was impossible for them to pay off their debt by the end of the year.1998 60 billion dollars was lent to Korea from international commercial lenders in order to help Korea out of debt.1/3 of banks closed which will later be discussed
- In Jan 1997 10,000 firms defaulting on paymentsListed here are only a few of the largest Corp in Korea that have filed for bankruptcyIn late 1997 the Won’s value fell by 50%Korea asked for IMF help which received $20 billion by the end of yearS&P gave Korea Junk bond status when the IMF forced Korea to show there true external reserves in Dec. and they received that grade because it was impossible for them to pay off their debt by the end of the year.1998 60 billion dollars was lent to Korea from international commercial lenders in order to help Korea out of debt.1/3 of banks closed which will later be discussed
- In Jan 1997 10,000 firms defaulting on paymentsListed here are only a few of the largest Corp in Korea that have filed for bankruptcyIn late 1997 the Won’s value fell by 50%Korea asked for IMF help which received $20 billion by the end of yearS&P gave Korea Junk bond status when the IMF forced Korea to show there true external reserves in Dec. and they received that grade because it was impossible for them to pay off their debt by the end of the year.1998 60 billion dollars was lent to Korea from international commercial lenders in order to help Korea out of debt.1/3 of banks closed which will later be discussed
- As I have mentioned, the major companies in Korea run under a chaebol system.The chaebol companies lend money to each other even though some of the companies were not profitable.Also before the crisis, these corporations neglected the domestic market, so they heavily relied on overseas markets.Because they relied on exports, the Korean companies began to heavily compete against one another, that created low profit margins.The corporations had too many large short-term debts that the state owned banks could not loan any more money.One of the ways how chaebol companies got away with sustaining many bad loans to that peak was that the loans were difficult to track was by having their company split into individual companies, and not one entire business group.Unlike GM which owns Chevrolet and Cadillac, but in the S&P they only show up as GM. So the large caebol corporations had a lot space to move money around.<number>
- Before the 1997 crisis the corporations did not have to show financial statements of the firms to the banks.The banks lead to there own failure for not asking the Chaebol’s for any financial statements. Individual CEO financial statements were enough.Because the banks are not allowed to be apart of the chaebol, the banks were not aware that the companies were not profitable until they filed for bankruptcy.Also, banks did not look for misuse of prior loans to pay off politicians or slush funds. The banks stop laning money to the corporations, not only because of the lost trust in the companies profitability, but because they simply they did not have sufficient funds, that is when the banks began to fail.The reason why the banks did not ask for financial statements was because the banks did not want to loose the chaebol corporations as clients. Also the banks knew corporations were not focused all on profit, it was a sign of status, and the banks respected this.Once the foreign creditors found out of that the banks could not loan any more to the companies, the foreign investors lost trust in Korea’s banks and took out there invested money. The banks also suffered because they were affected of the Asian and Japanese crisisI think that because the Korean crisis was different in the way that the cause of the crisis was mainly caused by the bank and cheabol corporations,It was easy to pin point what was needed to be done in order to recover from the crisis.<number>
- According to the IMF website, this was Koreas Unemployment rate.Korea was able to recover fast because they listen to the IMF immediately. They reduced the number of banks and financial companies in order for the government to have more control of true financial statements.Korea used better judgment in lending money to worthy credit borrowers.They also encouraged foreign investors to look at companies financial papers.They also encourage other countries to audit themKorea emphasized the importance tight money in gaining foreign investors confidence.
- According to the World Bank, This is the GDP growth rate of Korea in 97 and 98.The Korean crisis started near the end of 1997, that is why 1998 has been hit hardest.
- According to the Economic Planning Board and Bank of Korea, This shows the Total Debt of Korea from 1990 to 1997.As you may see that the debt has been steadily increasing. Also it is important to note that of the large Short term foreign debt in 1996,Which was one of the major causes of the crisis because Korea was unable to pay it off without the intervention of IMF and foreign help.<number>
- This is Koreas GDP, you can see how drastic 1998 was hit from the crisis. In 1997 it went from about 4 to about -6.Than it quickly recuperated.
- This is Koreas GDP, you can see how drastic 1998 was hit from the crisis. In 1997 it went from about 4 to about -6.Than it quickly recuperated.
- http://www.mof.go.jp/english/if/e1b064c3.htmManaged Floating – The central bank quotes and supports the exchange rate but varies it frequently. Indicators for adjusting the rate includes the balance of payments position, international reserves. Independently Floating - Rates are market-determined. Intervention aimed at moderating rate of change, rather than at setting a level for the rate. Problems with the exchange rate regime:The Korean won was loosely kept pegged to the dollar and banks tried to keep interest rates comparable to that of the US rates and to compete with US tradeIf they kept the won appreciated, imports from Japan was cheaper, also because Korea had a large debt with Japan, it made it cheaper to pay off. Quasi-pegged to the yenRefused to devalue with the devaluation with the yen. Mix of political and economical reasons. Depreciation of the local currencies on the foreign-exchange market means an increased burden of foreign debt.
- GOVERNMENT PLANS To be purchased by the government within 2 yearsGuarantee corporate bonds (with maturities over three years) – bailing out ailing corporationsForeign and domestic injections of funds to facilitate restructuring of financial institutionsBanks could not provide new credit to the corporate sector and raised interest rates to as high as 25% in Dec 1997Public viewed the policies as not credible and the government plans were obviously not enough if there is no money flowing.
- GOVERNMENT PLANS To be purchased by the government within 2 yearsGuarantee corporate bonds (with maturities over three years) – bailing out ailing corporationsForeign and domestic injections of funds to facilitate restructuring of financial institutionsBanks could not provide new credit to the corporate sector and raised interest rates to as high as 25% in Dec 1997Public viewed the policies as not credible and the government plans were obviously not enough if there is no money flowing.
- IMF INTERVENTION: 1997 (Package of $57 billion)1) - Required to submit a restructuring plan to the Ministry of Finance (oversees the financial policies of South Korea) and given 3-4 months to implement or be permanently closed2) By 2000, reduce moral hazard by deterring banks to reduce risky lending and for borrowers to be more careful with their funds and not count on a full deposit guarantee3) Blue Ribbon Committee and a similar committees which were independent to the Ministry of Finance.- Blue ribbon – a sign of very high quality = examined solvency of banksFinancial Supervisory Commission that oversaw solvency of large corporations and found 55. (insolvent = more debt than assets and unable to pay off debts)Large banks required to engage foreign firms to audit their books. Chaebols required to produce extensive financial statements- 4) Increasing bank competitiveness- 5) First five are appropriate remedies for lessening chances of a future repetition of the current crisis. In other words, it’s something that Korea should’ve done with or without the IMF intervention.
- IMF INTERVENTION CONTROVERSY6) IMF insisted on opening Korea’s capital market by raising ceilings on foreign ownership and setting a time table for complete elimination of trade barriers and trade related subsidies.Controversial to some because it is unclear how improving access of Korean corporations to foreign borrowing will help avoid a foreign debt crisis in the future. 7) It is also unclear how the 7th provision will help Korea adjustHow will increasing the credit-crunch (already credit starved Korea) plus undergoing bank closures, help economic recovery?Higher taxes on a population whose income is shrinkingReducing government expenditures with unemployment rising.IMF says that 7 will attract foreign investors (interest rates 30% at the time)
- CRITICISMExport driven models for rapidly growing industry of Korea and other Asian countries makes their economies heavily reliant on the economic health of their targeted export nations. In addition, these nations have met difficulties after they lost their initial competitive edge, cheap productive labour. India, China and much of Southeast Asia have now emerged as fast-growing economies based on cheap labour, largely replacing the Tigers.Crisis occurred 1 month before election and President Kim Young Sam placed politics before economic well-being of KoreaPresident’s son was indicted for accepting bribes to provide loans to chaebols President Kim’s desire to be a member of the OECD to further Korea’s growth. Requirement was free capital market and some argue that Korea was not ready for the change. Became unstable and left private sectors unchecked and unsound, banks did not have independence in making loans etc.
- What we can learn about Korea’s crisis isThat having Strong financial system would have solved the issue of the corporations before the crisis.Auditing companies on how and what they do with their money will give a strong understanding on how the companies are really doing.Regulation of Short-term loans are needed Losing foreign investors may lead country into crisisKeeping an appreciated currency is not always goodIMF intervention may save the economy rather quickCentral banks should be independent from government and corporations
- What we can learn about Korea’s crisis isThat having Strong financial system would of solved the issue of the corporations before the crisis.Auditing companies on how and what they do with their money will give a strong understanding on how the companies are really doing.Regulation of Short-term loans are needed Losing foreign investors may lead country into crisisKeeping an appreciated currency is not always goodIMF intervention may save the economy rather quickCentral banks should be independent from government and corporations
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