By Yoon Ja-young
Staff Reporter
History repeats itself. Greenspan called it ``once-in-a-century credit tsunami,'' but the current economic trouble is a case of deja vu here. The fear of the global tsunami is especially huge among Koreans, who underwent an IMF bailout package a decade ago. Businesses closed, people lost their jobs, some became homeless and some killed themselves. It was a life-changing incident for many Koreans, and even those who survived it shudder at the memory.
``I got home from school one evening and found distrainment papers pasted all over. My father's business went bankrupt. It was an unforgettable incident,'' reflects a 30-year-old, now pursuing an MBA in the United States.
Another reflects on having to join the military to ease his parents of the burden of college tuition, as his father had to close down a factory. He says he even had to wait as many young men chose to complete their military service first.
It also changed people's decisions about careers and study. Koreans were used to lifetime jobs, but the myth disappeared. Layoffs became common. Medicine, dentistry, and jobs in the public sector had never been so popular. ``I had always wanted to be a physicist, but my relatives insisted that one should have a skill to survive the national emergency. The financial crisis made me go to medical school,'' says a resident at Seoul National University Hospital.
Korea successfully graduated from the IMF bailout school, and came to boast the sixth-largest foreign exchange reserves in the world, totaling $200 billion. Hit by the global tsunami of the financial turmoil, however, the country is pawing.
Koreans, who still have the vivid memory of the Nov. 21, 1997 announcement that Seoul was seeking a bailout package from the IMF, have enough reason to react very sensitively to the current crisis.
A number of indices are clearly similar to those of a decade ago. During the Asian financial crisis, the Seoul bourse lost 70 percent from its peak. Currently, the main index has lost around 60 percent from October last year when it broke the historic 2,000 mark.
The won-dollar rate, which stood at around 850 won per dollar in 1997, soared to 2,000 won. It is rocketing as it did back then. The Korean won, which had traded at a little higher than 900 won per greenback, breached 1,500 won this week.
The real GDP growth contracted by 6.9 percent in 1998 ― a shock to the economy which had sustained near 10 percent growth ― and UBS recently rattled the market by forecasting minus three percent growth for the Korean economy next year. Per capita GNP, which breached the historic $10,000, shrank to near half, and now the country, which once reached the gate of $20,000 per capita income, is struggling.
Houses are piling up unsold, and an increasing number of people are applying for unemployment benefits. Rumors of layoffs are hurting workers, consumers are cutting spending, and a restructuring plan for industries is being prepared.
The reasons behind the two crises are similar but also different.
The main common factor is the dollar shortage and short-term foreign debt. Korea was depleted of dollars after current account deficits a decade ago, and now banks are rushing to get foreign exchange after excessive leveraging.
The crises started from a contagion effect. The external shock coupled with Korea's own weakness bore horrible consequences.
The crisis started in Southeast Asia in July 1997, and hit Korea in November. Foreign investors withdrew money from emerging Asia, and Korea was no exception. Conglomerates had made corporate investment through excessive leveraging, and financial firms lent them money by raising liquidity through short-term foreign debt. Both collapsed. Five commercial banks were liquidated, and half of the chaebol disappeared. The ``too-big- to-fail'' mantra, according to which conglomerates would never perish, no longer worked.
This year, it started from U.S. subprime mortgages. Low-credit homeowners failed to pay back mortgages as their home prices fell with the collapse of a housing bubble, and derivatives from these mortgages hit Wall Street. Global investment banks like Lehman Brothers and Merrill Lynch fell, insurance giant AIG failed, and now, Citi Group is said to be in trouble. Subprime mortgage trouble is rattling the whole world, and Korea could not avoid it. Firms and banks are suffering liquidity crunches as global liquidity has turned to safety assets. Asset prices are falling, and the economy is entering a deflationary stage.
Foreigners are not trusting the government as it did a decade ago. ``What we didn't know, but soon discovered, was the government had played games with the reserves. It had quietly sold or lent most of the dollars to South Korean commercial banks, which in turn had used them to shore up bad loans,'' recollects Alan Greenspan in his book ``Age of Turbulence.'' The finance minister said it wouldn't seek an IMF bailout package but changed his words after only two days.
The government issued a series of press releases recently refuting foreign media's negative reports on the economy stressing its ample foreign exchange reserves but it isn't gaining due trust, partly because of what happened in the past.
The biggest difference is its ample foreign exchange reserves, which the government says are enough to cover short-term foreign debt. Corporate debt ratio is also low ― around one fourth of that of a decade ago. They learned a lesson from the ``IMF crisis'' and refrained from too much leveraging. They focused more on profitability. The blow to the banking sector isn't likely to kill businesses.
Though a number of economic indices are similar, a totally different prescription is being taken in some ways. The IMF package is summarized as high interest rates and austerity. It was torturing, but the economy recovered quickly. In 1999, the economy recorded a 9.5 percent growth rate.
Now, it is going to the less torturous way ― trying to boost the economy through low interest rates and government spending.
Economists, however, agree that it will take more time until recovery. Back then the rest of the global economy was strong. Korea could rely on exporting. Now, however, the United States and EU, the main consumers in the global economy, are cutting spending. There is even concern that countries may turn to protectionism. A survey by the Korea Chamber of Commerce and Industry showed only one out of five companies say that business conditions are better now than a decade ago.
The domestic perspective is also gloomier, as people from all walks of life are suffering without exception. The wealthy could have enjoyed the `` IMF crisis,'' with banks providing over 20 percent annual interest rates on savings. Now, however, even the rich are hit. Most of them joined the asset bubble during the past few years, and some are suffering the aftermath of too much leveraging.