On Oct. 19, 2008, South Korea
announced a plan to guarantee foreign debts of its banks:
"The government has decided to join in global coordinated efforts to stabilize financial markets," Kang Man Soo, minister of strategy and finance, said at a news conference that followed a series of emergency meetings. "And we will continue to provide pre-emptive, decisive and sufficient measures to this end."
Kang was joined by the two other top South Korean economic officials, the Bank of Korea governor, Lee Seong Tae, and Jun Kwang Woo, head of the South Korean Financial Services Commission.
... It [South Korea's government] has said that South Korea now has more than enough foreign currency reserves, totaling $240 billion, to ride out the global liquidity crunch.
But concern has grown as countries like Iceland and Ukraine have begun asking for emergency financing from the International Monetary Fund, and as South Korea, the fourth-largest Asian economy, has begun to look vulnerable to the credit crisis.
Its currency, the won, has lost 30 percent of its value against the dollar this year. With borrowing costs soaring, South Korean banks have scrambled to secure the dollars needed to repay maturing foreign-currency loans. Its benchmark stock index, the Kospi, has fallen 38 percent so far this year.
....
In recent weeks, the government has urged major exporters like Samsung and Hyundai to sell some of their huge dollar reserves.
Under the measures announced Sunday, the government will offer a three-year guarantee on foreign debt taken on by South Korean banks from Monday to June 30, 2009.
It will also provide the banking industry with the equivalent of $30 billion in dollar liquidity by utilizing its foreign-exchange reserves. That comes in addition to the $15 billion the government has already injected into domestic banks and smaller companies since September.
The dollar shortage mentioned here does suggest that the reckless, theoretically ineffective spending authorized by the U.S. Congress does not even have a speculative basis for translating into U.S.$ hyperinflation.
However, as reported South Korea is in a position to repeat Argentina/2001. The problem is foreign-currency denominated debt. If the won weakens too drastically against, say, the U.S.$, it becomes impractical to purchase enough U.S.$ to avoid defaulting on U.S.$-denominated debt. This also applies to other fiat currencies.
And this is not a problem that can be solved by creating money out of thin air.
Of course, this assumes Parliament passes the above plan:
Currently, about $80 billion in foreign currency borrowing is due to mature by next June.
In addition, the Bank of Korea will make $30 billion available from its foreign exchange reserves, which amounted to $239.7 billion at the end of September, to domestic banks faced with dollar shortages.
....
The foreign-currency loan guarantee is subject to National Assembly approval. But lawmakers have dragged their feet on legislation this year, including economic measures. For instance, a stimulus package announced five months ago that would use surplus government funds to help consumers cope with rising food and energy prices still hasn't left the legislature.
....
Officials also announced the government will make an in-kind investment of 1 trillion won to the Industrial Bank of Korea, which specializes in loans to smaller businesses, to expand its capital base. And they unveiled tax incentives to encourage South Koreans to become long-term investors in equities and mutual funds, aiming to reduce some of the volatility in the country's stock market, which has fallen sharply along with others worldwide this year.
Leverage isn't helping either:
Financial strength outlook downgrades on the top four Korean commercial banks by Moody's Investors Service and a ratings warning by Standard & Poor's have focused attention on their exposure and increased the external pressure on their funding.
Moody's estimated the four banks' leverage, measured by loans-to-deposits, had touched 150 per cent, compared with the East Asian average of less than 100 per cent and the far larger Japanese main banks at 75 per cent. The high Korean leverage is exacerbated by unusually high levels of short-term debt.
Foreign investors have pulled an estimated $US18 billion net from South Korea this year, after making net $US30 billion new investments last year.
