| Business | October 09, 2008 6:45 AM EST |
| Time to Delever |
| The Financial Crisis and the Korean Banking System |
| By Danny Duarte from Markets.com |
Korea is a world away from the U.S. mortgage market but is highly affected by the financial crisis that its bust spawned. The Korean Won is down more than 25% against the dollar this year. The irony behind it all is that the credit crisis is bringing down the Won. The Won was rallying against the dollar before the crisis started in America. The reason for the paradox is that the Korean economy is still heavily dependent on external borrowing for growth.
It was just ten years ago that the South Korean economy came to a halt because of the Asian financial crisis. This time around South Korea has much greater reserves and a small budget deficit. The problem is that as credit becomes scarcer in other parts of the world investors are bringing their money back to domestic markets. South Korean banks have used funds from foreigners to fund rapid expansion at home.
The drop in the Korean Won does have one benefit to South Korea. It will help keep exports from plunging.Usually this kind of fall in the currency would boost exports but amid the global economic slowdown it will be hard to grow exports. Major Korean companies may be affected by slower economic growth because sales of their products particularly in Europe and the U.S. are likely to fall. Economic gains from exports are also likely offset by the fact that imports will cost more to bring in to the country.
The Government is now trying to take measures to help ease the problem. The first step it took was to encourage companies’ specifically financial companies to sell external assets to help raise dollars. This money could be used to lend to local institutions, which the government feels may have trouble raising money in the midst of the financial turmoil. The government also has tried to spearhead talks with Japan and China on a way the three nations can protect themselves from the crisis. Finally the Government has said that it would take look at measures to assure small to medium size companies have access to capital.
The problems that Korea is experiencing are not difficult to understand. The country is heavily indebted. Its domestic banks have loan to deposit ratios of 130%. South Korea is one of the few Asian nations whose people are not accustomed to saving. A country that is a borrower of credit is inclined to feel agonizing effects during accredit crisis. This time around is surely much different than the 1998 Asian Crisis for South Korea. The country is in much better position and has a much larger economy, but unfortunately it still will the feel the pain of deleveraging.
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