Commentary by William Pesek
Oct. 24 (Bloomberg) -- South Korea has become the Bear Stearns economy.
Just as excessive gloom on the part of pundits accelerated the demise of the 85-year-old investment bank, a bubble in negativity is causing a run on Korea. Bets that Asia's fourth- biggest economy is headed for a 1997-like crash risk becoming a self-fulfilling prophesy.
This isn't a blame-the-media column. Bear Stearns Cos. got in over its head with risky trades that threatened the firm with bankruptcy. There's still something to be said about how unsubstantiated rumors and speculation zooming around cyberspace hastened its collapse.
Korea isn't there yet, and there's ample reason to think it will avoid such a fate. Markets aren't so sure and Korea is under attack -- even though officials in Seoul make a valid case for the economy's health.
``We are a lot better equipped than 10 years ago,'' Jun Kwang Woo, chairman of Korea's Financial Services Commission, told Bloomberg News on Oct. 21.
On top of steps already taken -- pledging $130 billion to support banks, tossing a $6 billion lifeline to the construction industry and fiscal and monetary stimulus -- Korea is in the ``most comfortable position'' to implement additional economy- boosting efforts, Jun said.
`Swift and Broad'
Korea's policy steps so far have won the support of the three main credit-rating companies. Standard & Poor's, which last week sparked the biggest one-day drop in the won since 1997 by placing Korea's five biggest banks on review for a downgrade, called the bank plan ``swift and broad.''
It's worth accentuating the positive. Korean companies have become more competitive since the late 1990s and banks' capital and asset quality are reasonable. The nation's debt ratio is near the lowest among major economies. Korea has $240 billion of currency reserves.
``Fears of a balance of payments or banking crisis are overdone,'' Paul Gruenwald, Singapore-based economist at Australia & New Zealand Banking Group Ltd., said in an Oct. 22 research report.
It's true that Korea, like many other emerging-market economies, faces sizeable challenges as credit markets seize up. There also are vulnerabilities specific to Korea.
``These are bounded and not of a magnitude that warrant the doom-and-gloom commentary and pricing we are currently witnessing,'' Gruenwald said.
`IMF Crisis'
What's striking is how investors seem to have singled out Korea as the riskiest investment-grade economy in Asia. And in this interconnected, real-time world of ours, the more people chatter about another ``IMF crisis'' in Korea, the more one becomes possible.
Korea has made substantial progress since accepting a humiliating $57 billion bailout from the International Monetary Fund in 1997. President Lee Myung Bak has been reassuring investors that Korea can ride out the worsening global storm.
A key problem is that banks are again making the pre-1997 mistake of borrowing in short maturities and in foreign currencies. As that realization filtered through markets, Korea suffered a massive capital flight out of equities.
Korea is a cautionary tale for Asia. If things get worse, capital will increasingly leave emerging markets in search of destinations deemed less risky.
Market turmoil is dominating boardrooms. A case in point was Samsung Electronics Co.'s decision this week to scrap a $5.85 billion offer to buy SanDisk Corp., saying losses at the U.S. company may worsen as a glut forces chipmakers to cut prices.
Bear Stearns Dynamic
This is where the Bear Stearns dynamic comes into play. First, hedge funds and speculators went after top-rated Wall Street firms. Now, they are gunning for entire countries. With Iceland under their belt, Korea tops the list of next targets.
Export-driven Korea has its vulnerabilities. As Daniel Soh, an economist at Forecast Pte in Singapore, put it: ``South Korea's economy is definitely heading down. The construction industry is a major worry. The economy will slow into a recession. It's happening all over the world.''
It's the last part of Soh's comment that's most important. The credit crisis is a global phenomenon and yet Korea is the Asian economy being punished the most.
Some of this is attributable to negative news coverage. Isn't it possible that the more observers buzz hyperbolically about another Great Depression, the more likely consumers will internalize that risk and help bring it about? This is less about blaming the media than wondering why so many are negative about Korea for seemingly irrational reasons.
Taking Lumps
It stands to reason that investors would harbor concerns about Asia's emerging markets. After all, Thailand and Indonesia, both of which joined Korea in 1997 in accepting IMF bailouts, are taking their lumps.
Also, investors such as Kim Sung Kwang of Hanwha Investment Trust Management Co. in Seoul have a point when they argue the ``government has been late in responding to market calls for such measures, which once announced, don't go beyond what the market has already expected.''
There is more to be done and this is crunch time for Lee, a former chief executive officer of several Hyundai Group affiliates. He needs to act boldly and convince investors that a crisis isn't imminent. Those bracing for the worst may want to give Korea the benefit of the doubt.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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