The news of a possible investment by the Korean Development Bank in Lehman is overshadowing far more important developments, at least as far as most Koreans are concerned. The won is on a rapid slide, in a worrying parallel to the Asian currency crisis of 1997, and some other currencies in the region are under stress as well.
As the Standard reports (hat tip reader Saboor):
The won fell 2.5 percent to 1,116.00 against the dollar. The Korean government is “seriously concerned” about the decline…
Indicators show the South Korean economy is in its worst shape since the Asian financial crisis, finance minister Kang Man Soo told a parliamentary session yesterday.
South Korea posted a net capital outflow of US$5.77 billion (HK$45 billion) in July, the largest since December 1997. However, Kang insisted the current economic situation is different from that of 1997, especially the level of foreign debt.
The Philippine peso fell to its lowest level for a year after oil prices rose, increasing the nation’s demand for dollars to pay for the commodity. The currency declined 0.9 percent to 46.32 versus the dollar.
Taiwan’s currency fell to a six-month low on speculation its central bank will seek a weaker currency to support exports. The New Taiwan dollar dropped as much as 0.4 percent to NT$31.65 against the US dollar.
“The trend still points to weaker Asian currencies,” said Christy Tan, a Singapore- based strategist at Bank of America.
“What’s dragging not just Taiwan, but the rest of the region, is the fact that growth is slowing while inflation is still staying firm. Shoring up growth is gaining priority.”
India’s rupee hit a 17-month low after data showed a fourth straight month of net foreign fund outflow from the stock market. The Singapore dollar weakened 0.6 percent and the Thai baht 0.2 percent.
The UK Times linked Korea’s woes to its Fannie and Freddie holdings:
The deepening woes at Fannie Mae and Freddie Mac, badly stretched central bank reserves and a losing battle to support the won are pushing South Korea towards a full-blown currency crisis this month, analysts have said.
Heavy investment by the Korean Government in Fannie, Freddie and other US-related agency bonds has left a potentially huge liquidity problem – perhaps $50 billion (£27.4 billion) – in the foreign reserve portfolio. Some believe that Seoul might have no ammunition left to prevent a significant flight from the won. Fruitless currency intervention by South Korea – increasingly desperate-looking verbal and financial measures to fight the market trend – cost about $20 billion in July alone….
A large part of Korea’s foreign reserves are not government bonds but the kind of US-based mortgage-related bonds that once looked so solid. Depending on how the Fannie and Freddie situation develops, a significant portion of Korea’s forex reserves could turn out to be extremely illiquid, leaving the country ever more vulnerable to external shock.
“The coverage ratio may in reality be not as comfortable as the authorities would like, meaning they have less with which to defend the currency,” said one senior Asia-based economist.
In other words, one of Korea’s last ditch measures to defend its currency would be to sell its remaining Freddie and Fannie debt, but the lack of liquidity argues against that.
The fall in oil prices should in theory help reduce inflationary stresses, but since traders have used the dollar as the anti-oil trade, the appreciation of the dollar means that the relief in energy costs is offset to a considerable degree by the currency fall against the dollar.
A report in the English language version of Chosunilbo gives a sense of the local mood (hat tip reader Saboor):
Rumors of an impending financial crisis in September are sweeping through Korea’s financial markets. On Monday, the first day of the month, the Korean stock market dropped more than 4 percent to the lowest in a year and 6 months, while the Korean currency weakened past the W1,100 barrier against the U.S. dollar for the first time in three years and 10 months…..
The government and financial experts say there is almost no chance of a crisis in Korea, but market players link various economic data with the rumored September crisis and the sense of uncertainty leading to actual decline. Lee Jong-woo, managing director of HMC Investment Securities, said nothing out of the ordinary happened on the stock market on Monday. “Investors unloaded their stock holdings due to predictions that share prices would fall further on Tuesday: it was psychological uncertainties that led to the sell-off,” he said.
The main reason behind Monday’s panic was the September crisis rumor, which refused to go away despite government efforts to calm jitters. Stoking them was a scenario where W8 trillion (US$1=W1,118) worth of foreign investment in bonds maturing in September would exit the Korean market at once, further undermining the won and leading to a string of bankruptcies in financial institutions.