Editorial: Korean rescue is only a start
If Korea succeeds, and raises substantial amounts of new money from the capital markets, it will be a remarkable turnaround in the few weeks since Christmas, when a debt moratorium was just days away. “Korea’s problem was atypical in the first place and Korea is proving atypical in its turnaround,” says Stern. “This is an OECD country, an industrial country, with a long record of growth and export capacity which ran into a liquidity problem. For sure, that was the result of poor financial management. But everybody saw this as a temporary problem; everybody was convinced of Korea’s ability to restructure and recover.”
Unfortunately, the speedy and relatively smooth process of stabilizing Korea’s short-term financial problems provides no template for other economies in Asia. Indonesia is a more troubling case showing signs of both long-term and short-term debt problems at both the public and private sector level. And it has the added complexity of a less stable political scene. Still, the fact that Korea pulled back from the brink shows that it can be done, and importantly stabilizes one of Asia’s three biggest economies.
Rhodes says: “When the Asian crisis first hit last summer, people didn’t think the Korean problem would be that serious. Then by Christmas they thought it was going to be the end of the world. As it turns out, both expectations were wrong. When completed, this deal is the first big step, one which restores the all-important confidence, internally as well as externally, and will lead to Korea’s return to the international capital markets for new money.” And the worst moments?
Rhodes admits that briefly Korea and its banks were staring into the abyss. “When John Reed asked me to become involved in Korea, the country was well on its way to default, haemorrhaging $1 billion to $1.7 billion a day from its international reserves. In the first few days we also were worried that the IMF wouldn’t continue its disbursements, that there would be no second line of defence money, and that all of this eventually could lead to default and therefore set a terribly negative precedent for other countries in Asia.”
