Basics and politics of Korean Crisis 1997-98

I came across this excellent speechfrom Kim Khiwan presented at this IMF seminar on Emerging Market crisis. The speech is a primer on the Korean crisis (just like this speech on Nordic crisis -1990).

Korean crisis was a result of mismatches- currency mismatch (borrowed in foreign currency and invested in home assets), maturity mismatch (borrow short and invest long), balance sheet mismatch (assets in Won and liabilities in USD)  

What were the crisis triggers? 1) Strengthening of USD (meant foreign liabilities became costlier), allowing a industrial group to fail ( Hanbo, just like Lehman now) , the South-east Asian crisis becoming a contagion. How was the crisis eased? Via IMF and US help. And since then Korea has tried to implement reforms but am not sure whether they have helped as it still looks in dire straits.

Anyways, What interested me more was this interesting aspect of Korean crisis management:

On December 19, at the Korean government’s request, the U.S. government not only persuaded the IMF to quickly enter into a new round of negotiations with the Korean government for a further frontloading of bailout money, it also exerted its credits to Korea for one month. In return for this favor, they were promised to have an opportunity to reach an agreement with the Korean government in restructuring their outstanding short-term loans to Korea. influence on the financial institutions of G-7 countries to roll over their short-term credits to Korea for one month. In return for this favor, they were promised to have an opportunity to reach an agreement with the Korean government in restructuring their outstanding short-term loans to Korea.

One would guess US did this for economic gains but Khiwan offers an interesting twist in the tale:

We should note that it was principally out of security considerations that the United States government took a series of actions that enabled Korea to meet its liquidity requirements. Put differently, the US felt that unless it helped Korea in a hurry, its security position could be jeopardized, particularly the safety and well-being of some 36,000 US troops then stationed in Korea.

Well, well. This is an insider’s version of the story and is really interesting. It is political economy of crisis management. Obviously, Khiwan raises concerns over this approach:

This point has disturbing implications for the IMF and others. Suppose another country with a size similar to that of Korea faces a financial crisis today. Under the existing charter, could the IMF arrange a support package that is comparable to the one offered to Korea at the end of renegotiations?

In addition, ask yourself who could arrange the kind of international rescue package that was put together under the US initiative. What’s more, ask if the US would take the initiative for that country if it had no special security relationship comparable to that of the US and Korea. I would like to invite you all to seriously consider these hypothetical questions.

In the current crisis we are seeing no such issues as US itself is struggling big time. However, it would be interesting to see the reasons for US interventions in previous other economies’ crisis. And you never know, as the crisis eases (whenever it happens) and US recovers, it could still try and help a few other economies which could still be struggling. If this scenario does take place and US does help, one should look for reasons other than economics.

7 Responses to “Basics and politics of Korean Crisis 1997-98”

  1. Tirath Says:

    “Political economy of crisis management” – well put
    Something that I had been thinking of: Saudi Arabia never does anything wrong may be because of oil games. Iran, Afghanistan & Iraq do everything wrong because energy outweighs perceived security threats. Of course, there many sides to the ‘whys’.
    Just my 2 paise

  2. Balance Sheet Approach to crisis identification/prevention « Mostly Economics Says:

    […] (The paper was presented in this IMF conference. (I covered a paper presented in this conference on Korean 1997-98 crisis; this paper also pointed to mismatches in Korean balance […]

  3. Why four countries were selected for USD swapline with Fed? « Mostly Economics Says:

    […] had earlier pointed that  US helped S Korea in 1997-98 crisis because US had special security relationship with […]

  4. Lessons from East Asian Crisis « Mostly Economics Says:

    […] of attention. The politiicians initially said no to IMF aid but had tioe eventually take it. I had earlier pointed to an interesting angle on why US came forward to help Korea so quickly. But other East- Asian economies also had huge […]

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