German bail-out approved, South Korea 'at risk'
As Germany’s parliament approved a €500bn rescue package for the country’s financial markets and financial turmoil spreads around the world, South Korea may prove to be one of the most vulnerable countries in Asia.
With its banks facing potential trouble, its currency and stocks reeling and consumer debt on the rise, South Korea’s woes have stirred memories of the regional economic crisis that struck it more than a decade ago.
Now, amid criticism that officials have done too little too late, government leaders there are racing to restore confidence in the country’s economy.
The German plan, handed to parliament yesterday after approval on Monday by Chancellor Angela Merkel’s Cabinet, is part of a coordinated European bail-out effort in the face of nervous, volatile markets.
“We hope that the law passed today will hinder the worst from happening to the financial markets,” said Peter Struck, parliamentary leader for the Social Democrats, which make up half of Ms Merkel’s coalition government.
Earlier this week, Ms Merkel warned that “the danger for financial market stability has not yet been banished”.
“We must, by approving this bill, as quickly as possible create the basis for calming the situation on the markets,” she said.
The German package foresees up to €400bn in lending guarantees for banks.
On top of that comes as much as €79bn to recapitalise banks and, if necessary, buy up risky assets.
The sums are considered a maximum, and might not all be spent if the financial crisis eases.
Ms Merkel has stressed that there will be “no payment without a trade-off”. Banks seeking capital help will have to comply with government-set conditions that could include limits on managers’ pay and directions on lending policy.
Politicians in the lower house voted 476 in favour and 99 against the plan yesterday, with one abstention. The upper house then approved the package unanimously.
Before the lower house vote, leaders of the opposition Greens and Left Party said their members would cast their ballots against the package, while the pro-business Free Democrats said they would join Ms Merkel’s governing coalition of Christian Democrats and Social Democrats in approving it.
President Horst Koehler formally signed it into law Friday afternoon, and Merkel’s Cabinet has already arranged a special meeting for Monday to discuss implementing the plan.
The package came a day after Germany, Europe’s biggest economy, lowered its GDP growth estimate for 2009 by a full percentage point to 0.2 % because of uncertainty in the world financial systems.
Last night, the South Korean the government held an emergency meeting to discuss how best to respond to the market turmoil. In recent days, officials have sought to reassure their fellow citizens that another collapse is not in the making.
“Korea’s foreign exchange reserves amount to $240bn, all of which are readily available at anytime,” president Lee Myung-bak told the nation in a radio address on Monday. That figure was 27 times larger than when the Asian financial crisis hit the country in 1997, he said.
Despite Lee’s reassuring words, some analysts have sounded alarms about South Korea, most notably its banks.
They say the global credit crunch is making it hard for local banks to acquire dollars and other foreign currency needed to refinance activities such as foreign-denominated loans to domestic companies and cite personal debt levels as a cause for worry.
Also, the country’s broadest measure of trade – the current account – is expected to record an annual deficit for the first time in a decade, meaning South Korea is spending more on goods, services and investments from overseas than it sells abroad.
South Korean stocks have been no exception to the worldwide rout in equities spurred by the US credit meltdown, falling 38% this year. They had already dropped 22% even before the collapse last month of Lehman Brothers Holdings Inc.
South Korea’s currency was also having a bad 2008 even before declines against the US dollar accelerated amid the crisis. The won has plummeted almost 30% this year against the dollar and had its worst single day – a drop of 9.7% Thursday - since December 31, 1997.
“Ongoing stress in the Korean financial market seems to be a mixture of domestic credit crisis, balance of payment crisis and global credit crisis,” Citibank Korea economist Oh Suk-tae wrote in a report.
Standard & Poor’s Ratings Services said this week it may downgrade the credit ratings on some of South Korea’s biggest banks, citing “a more than 50% chance that the global liquidity squeeze could threaten Korean banks’ foreign currency funding” .
“We expect the stress on the Korean financial system to be prolonged,” S&P analyst Kim Eng Tan said last night.
South Korea, where consumer debt levels soared in 2003 after the government encouraged credit card use to spur the economy, has again been seeing rising levels of personal debt.
