Download Financial Crisis in Korea

Sun Ho Choi, Soon Sam
Kang
Ki Seok Yang, Sang Jun
Yeo
Overview
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Introduction
Causes of the Crisis
Policy Response
Policy Lessons
I. Introduction
• Background (Until 1997)
– After Korean war, Economic growth like
miracle after 1960’s.
– Korea’s Growth rate surpassed 7%
– Inflation remained at moderate levels
– Domestic saving increasingly financed the
rapidly rising investment rate
II. Effects of the Crisis
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Recession and terms of trade
deterioration
Corporate Bankruptcy
Banking Crisis
Contagion from foreign currency crises
Currency crisis
II. Effects of the Crisis
 Recession and terms of trade deterioration
GDP
Q. Deterioration?
A. The structure of
Korean Economy Problem
 Inventories up,
 Demand down
 Cause production cost
8.0
4.8
1994
1995
1996
II. Effects of the Crisis
Major Economic Indicators in Korea around 1997
1993
1994
1995
1996
1997
1998
GDP growth rate 1)
(%)
5.7
8.4
8.2
4.8
2.4
-7.1
CPI (rate of
change, %)
4.8
6.3
4.5
4.9
4.4
7.5
Current account
(bill. US$)
1.0
-3.9
-8.5
-23.0
-8.2
40.3
Unemployment
rate (%)
2.9
2.5
2.1
2.0
2.6
7.0
Budget
balance/GDP
2)(%)
0.08
0.53
0.45
0.03
-0.02 -2.97
II. Effects of the Crisis
 Corporate Bankruptcy
• the chaebols (Korean big business groups) went bankrupt.
• The portion of non-performing loans
In total loans of banks rose
from 4.1 percent at the end of 1996
to 6.0 percent at the end of 1997.
II. Effects of the Crisis
 Banking Crisis
• Under these circumstances,
• the Thailand Baht suddenly plummeted on July, 1997
• signaling the beginning of currency crises
in South East Asian countries.
=> No longer loan from abroad
II. Effects of the Crisis
 Currency crisis
•The nation's stock of foreign reserves
was rapidly depleted
•Financial institutions failed to recover
credit-worthiness.
In consequence,
•the Korean government asked
the International Monetary Fund for emergency credits.
(IMF)
II. Effects of the Crisis
 Check Point Korean Economy in 1997
•Overinvestment
Excessive competition, Expand Area.
More and more, low profit
•Maturity Mismatches
=> No choice, firms rely on short term foreign debt.
•Lack of Disciplines
=> Rapidly change but over control
II. Effects of the Crisis
• External shocks were weaker, but their
effects were much stronger
External
•Unstable international
international oil prices
•Turmoil in the
international financial
market
•World-wide economic
economic recession
Internal
•Bad harvest
•Political and social
unrest
III. Policy Response
• Methods molded after general IMF crisis
resolution (Stand-by Agreement)
– Macroeconomic stabilization policy:
Restructuring policy
– Microeconomic Structural adjustment Policy:
Structural Adjustment Policy by two stages
III. Policy Response
Macroeconomic stabilization
• Goals
– Restriction of domestic demand and expenditureswitching
– Preventing capital inflows
– Correct the balance of payment deficits
• Exchange rates were allowed to depreciate
freely and reflect market forces fully
• Money market rates were raised sharply to
control the inflationary impact of won
depreciation
III. Policy Response
Microeconomic Structural Adjustment
• Goal
– Resolve structural problems in each market
– Establish the institutional Setting for a well
Functioning market mechanism
• Two stages
– First: Establishing basic institutions needed for
smooth operation of a market economic system
– Second: Improving the management and governance
of firms and banks through their initiatives
III. Policy Response
First, Institution
• three existing financial supervisory
agencies into one agency
① The Financial Supervision Commission
② Expanded the function of Korea Deposit Insurance
Corporation (KDIC).
③ Establishing Korea Asset Management Corporation
(KAMCO) to dispose of non-performing loans.
III. Policy Response
• Amended Bankruptcy law provisions
• Eased M&A restrictions
• Strengthened disclosure requirements for accounting
information
• Introduced measures to improve corporate
governance
• Provided better monitoring and supervision of
corporate or bank managers
• Devised measures to restrain over-borrowing by firms
• Government forced extremely troubled banks to exit
the market
• Used public funds to buy non-performing loans
• Allowed main creditor banks lead the debt workout
programs resolved delinquent firms
III. Policy Response
Second, Improving management and
governance
• Includes efforts to correct problems in the
financial, enterprise, labor, and public service
sectors.
• Addresses issues of regulating the undesirable
behavior of economic agents, like moral hazards.
– Adopting the global accounting standards
– Strengthening the rule of law
IV. Policy Lesson
1) Problems intrinsic to the economic system should
be cured fundamentally to prevent recurrence
2) Fixed or managed fixed exchange rates can be
dangerous
3) Strengthen financial systems against external
financial shocks
4) Deliberate approach on financial liberalization
5) Proper post-crisis resolution policies by a
competent government is important