By mid-December, bankers, central bankers, governments, the IMF, were increasingly worried that Korea was on the point of financial collapse. Its banks were weighed down by excessive short-term foreign-currency debt; its hard-currency reserves were on the point of exhaustion. Worryingly, the $57 billion multilateral government and IMF aid package hammered out in November had failed to stop the haemorrhaging of liquidity, confidence and credit.
Senior figures in the US treasury privately told bankers that they had fully expected the IMF agreement and the promise of $57 billion in aid to shore up confidence among foreign creditors to Korea sufficiently for the country immediately to return to the international bond markets to raise new money. But the surprise failure in December of a proposed $2 billion three-year bond deal for the Korean Development Bank, led by JP Morgan, left this strategy in tatters and precipitated a crisis. ‘The KDB deal was a real watershed,’ recalls one US banker.
Potential investors in that deal had been horrified when Korean officials could not provide a credible breakdown of the precise maturity profile of debts of Korean banks falling due within one year. Dealers in Korean commercial paper saw $600 million worth of Korean paper mature in a single week in December and investors refuse to buy any more. Some commercial banks, notably the Japanese which were themselves suffering from a hike in their funding costs, had begun to call in credit lines. Somewhere in the region of $25 billion of liquidity had drained out of Korea between June and December as Korean banks repaid short-term debts which were not renewed, and commercial-paper investors declined to roll over some $5 billion in outstandings.
The IMF and the G7 central banks were scrambling for information. Throughout December the New York Federal Reserve Bank had been calling banks daily for information. What were they doing in Korea? What did they see other banks doing? On December 18, the populist Kim Dae-Jung was elected president and, after being briefed on the country’s financial condition, pronounced that Korea was on the edge of a precipice. Any lender that had previously failed to grasp the problem had his attention caught by that remark. The international credit ratings agencies, acutely embarrassed that they had rated Korea AA- in the summer of 1997, went into a frenzy of competitive down-grading. First Moody’s pushed Korea’s rating below investment grade and then Standard&Poor’s took it to single B.
