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Sun Ho Choi, Soon Sam Kang Ki Seok Yang, Sang Jun Yeo

Sun Ho Choi, Soon Sam Kang Ki Seok Yang, Sang Jun Yeo. Financial Crisis In Korea. Overview. Introduction Causes of the Crisis Policy Response Policy Lessons. I. Introduction. Background (Until 1997) After Korean war, Economic growth like miracle after 1960 ’ s.

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Sun Ho Choi, Soon Sam Kang Ki Seok Yang, Sang Jun Yeo

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  1. Sun Ho Choi, Soon Sam Kang Ki Seok Yang, Sang Jun Yeo Financial Crisis In Korea

  2. Overview • Introduction • Causes of the Crisis • Policy Response • Policy Lessons

  3. I. Introduction • Background (Until 1997) • After Korean war, Economic growth like miracle after 1960’s. • Korea’s Growth rate surpassed 7% • Inflation remained at moderate levels • Domestic saving increasingly financed the rapidly rising investment rate

  4. II. Effects of the Crisis • Recession and terms of trade deterioration • Corporate Bankruptcy • Banking Crisis • Contagion from foreign currency crises • Currency crisis

  5. II. Effects of the Crisis • Recession and terms of trade deterioration GDP Q. Deterioration? 8.0 • The structure of • Korean Economy Problem • Inventories up, • Demand down • Cause production cost 4.8 1994 1995 1996

  6. II. Effects of the Crisis Major Economic Indicators in Korea around 1997

  7. II. Effects of the Crisis • Corporate Bankruptcy • the chaebols (Korean big business groups) went bankrupt.  • The portion of non-performing loans • In total loans of banks rose • from 4.1 percent at the end of 1996 • to 6.0 percent at the end of 1997. 

  8. II. Effects of the Crisis • Banking Crisis • Under these circumstances, • the Thailand Baht suddenly plummeted on July, 1997 • signaling the beginning of currency crises • in South East Asian countries. • => No longer loan from abroad

  9. II. Effects of the Crisis • Currency crisis • The nation's stock of foreign reserves • was rapidly depleted • Financial institutions failed to recover • credit-worthiness.  • In consequence, • the Korean government asked • the International Monetary Fund for emergency credits. • (IMF)

  10. II. Effects of the Crisis • Check Point Korean Economy in 1997 • Overinvestment • Excessive competition, Expand Area. • More and more, low profit • Maturity Mismatches • => No choice, firms rely on short term foreign debt. • Lack of Disciplines • => Rapidly change but over control

  11. II. Effects of the Crisis • External shocks were weaker, but their effects were much stronger

  12. III. Policy Response • Methods molded after general IMF crisis resolution (Stand-by Agreement) • Macroeconomic stabilization policy: Restructuring policy • Microeconomic Structural adjustment Policy: Structural Adjustment Policy by two stages

  13. III. Policy Response • Macroeconomic stabilization • Goals • Restriction of domestic demand and expenditure-switching • Preventing capital inflows • Correct the balance of payment deficits • Exchange rates were allowed to depreciate freely and reflect market forces fully • Money market rates were raised sharply to control the inflationary impact of won depreciation

  14. III. Policy Response • Microeconomic Structural Adjustment • Goal • Resolve structural problems in each market • Establish the institutional Setting for a well Functioning market mechanism • Two stages • First: Establishing basic institutions needed for smooth operation of a market economic system • Second: Improving the management and governance of firms and banks through their initiatives

  15. III. Policy Response First, Institution • three existing financial supervisory agencies into one agency • The Financial Supervision Commission • Expanded the function of Korea Deposit Insurance Corporation (KDIC). • Establishing Korea Asset Management Corporation (KAMCO) to dispose of non-performing loans.

  16. III. Policy Response • Amended Bankruptcy law provisions • Eased M&A restrictions • Strengthened disclosure requirements for accounting information • Introduced measures to improve corporate governance • Provided better monitoring and supervision of corporate or bank managers • Devised measures to restrain over-borrowing by firms • Government forced extremely troubled banks to exit the market • Used public funds to buy non-performing loans • Allowed main creditor banks lead the debt workout programs resolved delinquent firms

  17. III. Policy Response Second, Improving management and governance • Includes efforts to correct problems in the financial, enterprise, labor, and public service sectors. • Addresses issues of regulating the undesirable behavior of economic agents, like moral hazards. • Adopting the global accounting standards • Strengthening the rule of law

  18. IV. Policy Lesson • Problems intrinsic to the economic system should be cured fundamentally to prevent recurrence • Fixed or managed fixed exchange rates can be dangerous • Strengthen financial systems against external financial shocks • Deliberate approach on financial liberalization • Proper post-crisis resolution policies by a competent government is important

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