Growing fears of a debt default by South Korea were fanned yesterday by a nervous statement about the country's financial crisis from Mr Kim Dae-jung, president-elect, and by new downgrades of Korean bonds by international rating agencies.
The South Korean currency, the won, fell 14 per cent to a record low of 1,962 to the dollar from 1,715 on Monday. The won was valued at 1,000 to the dollar only a month ago. Interest rates hit a new high of 31.11 per cent, up 1.11 percentage points. The stock market fell a daily record of 7.5 per cent to 366.36 points.
Investor confidence was shaken by downgrades of Korean government and corporate bonds to junk bond status by Moody's Investor Service and Standard & Poor's, the US credit rating agencies. The fear is that these moves might dissuade foreign banks from rolling over short-term debts of up to $20 billion by the end of the year.
The World Bank last night approved an extraordinary $3 billion loan to meet Seoul's liquidity problems and solve structural problems. Bank officials said approval of the loan reflected confidence that Korea's economic fundamentals remained sound.
The funds would be part of the $10 billion support package the bank approved for South Korea on December 3rd.
"Normally it would take months" for the money to be made available, according to a bank official last night. "But everyone has worked very quickly to get this together," he said, adding that once approved "the funds could start flowing immediately."
In Seoul, candid remarks about the debt situation by Mr Kim Dae-jung also alarmed markets. "We don't know whether we would go bankrupt tomorrow or the day after tomorrow. I can't sleep since I was briefed (about the financial situation). I am totally flabbergasted," he reportedly told members of his centreleft party.
But a party spokesman late yesterday said that the comments were misunderstood because they were only meant to underscore the severity of the crisis Korea faced, forcing it to agree to a $57 billion bail-out from the International Monetary Fund.
Mr Kim, who has close ties with trade unions, yesterday said he would push for early parliamentary passage of labour laws making it easier for companies to sack workers as part of industrial restructuring. Government officials tried to reassure foreign investors, who are crucial to Korea's recovery, that Seoul was not facing a de facto sovereign default.
A presidential spokesman said Mr Kim Mahn-je, the chairman of state-run Pohang Iron & Steel, who has just returned from visits to the US, Japan and the European Union as a special envoy to discuss measures to prevent Korea from defaulting, reported that a debt moratorium was unlikely. Among the measures he discussed were a $10 billion sovereign bond issue early next month to cover a similar amount of short-term foreign debt due in January. Citibank is considering leading a consortium of international banks in purchasing the bond issue, according to domestic media reports.
The government claims it will have sufficient reserves to cover short-term debts due this month after the IMF and other multilateral agencies deliver at least $13 billion in rescue funds. Korea will offer state payment guarantees for bank loans to persuade foreign banks to roll over debts.
Meanwhile, Korea faced the prospect of growing energy shortages as oil companies have been forced to use scarce dollars to pay for imports since troubled banks have been reluctant to issue letters of credit to guarantee payments.
The government plans to use state-run energy companies to import oil and gas to ease threatened shortages.
