Korea: Credit Crisis Sinks In; Won Plunges

South Korea's currency fell to a 10-year low Wednesday as Asian markets were battered in the wake of Wall Street's recent woes

By Moon Ihlwan

The South Korean currency on Oct. 8 sank 4.8% to a 10-year low as the ongoing global credit crunch forced local banks to scramble for the dollar and prompted many companies to hoard the greenback. President Lee Myung Bak's dismissal the day before of speculation that the country could face a repeat of the Asian financial crisis a decade ago did little to calm the Korean currency market.

The won, which closed at 1,395 to the dollar, has lost 16.8% of its value since U.S. investment bank Lehman Brothers filed for bankruptcy in mid-September. Since the beginning of the year, the won has dropped 33% against the dollar, making it the world's worst performing major currency, and one whose direction is impossible to call. "The visibility is almost zero," said a Kookmin Bank dealer of the Korean currency's near-term movement.

Elsewhere in Asia, the Japanese yen soared even as stocks plummeted in Tokyo, where the Nikkei 225 benchmark index lost 9.4%. That marked the third biggest decline in its history, wiping $250 billion off stocks. "This isn't normal," Prime Minister Taro Aso, who became the Japanese leader two weeks ago, told Parliament. The plunge, he added, "is frankly beyond our imagination." This year Japan's stock market has lost 40% of its value despite the country's banks being relatively unaffected by the subprime crisis.

Indexes Plunge Across the Board

The carnage was evident all over the region, with benchmark stock indexes in Hong Kong, Singapore, South Korea, Taiwan, Indonesia and Thailand all falling by more than 5%. Indonesia halted share trading after the key index dropped by 10%. Concerns about unstable financial sectors in the U.S. and Europe and fears about a global recession pushed the yen below the 100 to the dollar mark for the first time in six months.

The financial turmoil has sent monetary authorities in the region scrambling to stabilize markets, so far with little apparent success. The Japanese and Australian central banks pumped $20.9 billion and $856 million respectively into their financial systems to help stop a surge in borrowing costs. Hong Kong cut the rate at which it lends to banks by one percentage point. Yet investors remained unconvinced these measures will suffice. "The panic simply isn't going away," says Park Kyung Min, chief executive officer at fund manager Hangaram Investment Management. Investors are spooked over a global credit crisis that triggered the worst capital flight from Korea since Asia's financial meltdown in the late 1990s. The International Monetary Fund warned the world's major banks may need $675 billion in fresh capital over the next several years to recover from the credit crisis.

Few economists and analysts expect Korea will face dangers this time around similar to those in 1997 when it sought a $57 billion emergency loan from the IMF to avert sovereign default. The country has one of the world's largest foreign exchange reserves, standing at $243 billion in August, although they fell for five straight months, down from $264.2 billion as the government used some of the money to try to stem the slide of the won.

Issues in Trade, Capital Investment

However, the central bank is up against a number of factors hammering the won. For starters the country's trade account swung to a deficit of $12.3 billion in the first eight months of this year from a surplus of $9.8 billion in the same period last year, mainly because of the high costs of importing oil and raw materials. Korea, which relies on imports for its oil demand, paid some 70% more for its oil bill during the period.