World markets spooked by fresh S Korean crisis

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The economic crisis in South Korea deepened yesterday. after leading credit agencies slashed their ratings for South Korea debt. Stephen Vines in the Far East and Diane Coyle in London report on how growing concerns about South Korea's financial stability prompted a mass sell-off throughout the world's stock markets.

The FTSE tumbled by 94.8 points yesterday to close at 5035.9 after a day's heavy share trading. At one stage in the day, the FTSE was 131 points down. The share fall, which was mirrored in stock markets world- wide, was prompted by the worsening crisis in South Korea.

Overnight, the won, the Korean currency fell by its maximum daily limit of 10 per cent to a record low against the dollar in just a few minutes. And concerns that the Korean authorities are failing to tackle the crisis were underlined yesterday by news that two leading credit agencies, Moody's and Standard & Poor's (S&P), had sharply downgraded the country's credit ratings.

The latest wave of stock market selling was prompted by fears that the International Monetary Fund's $57bn (pounds 35bn) rescue package will be insufficient to meet the country's short-term debt obligations. Korea's short-term overseas debts are now estimated at $100bn. Although some of this reflects lending between branches of Korean banks and companies, some $40bn is thought to need refinancing before the end of this year.

Standard & Poor's has put Korea on a BBB-minus rating, one rank above junk bond status. Spokesman John Chambers said it had placed the country on a negative credit watch, and would decide within the next few weeks whether to announce a further ratings downgrade.

Standard & Poor's followed an overnight decision by rival agency Moody's Investors Service, which lowered its rating on South Korea's foreign debt and also downgraded the ratings of 31 Korean companies.

Officials acknowledge that the IMF's package will only succeed if South Korea undertakes financial and economic reforms. To this end. a special session of congress is due to agree later this month to give the central bank more independence, improve financial supervision, and legislate for commercial companies to produce properly audited consolidated accounts.

But commentors believe that Korea needs to do much more to tackle its long term problems. Much of Korea's foreign debt is owed by the big industrial conglomerates, whose average debt to equity ratio is above 300 per cent. As a result, a sharp economic slowdown, expected by many experts next year, will push many companies into bankruptcy. According to investment bank JP Morgan, 15,000 companies have already filed for bankruptcy in 1997.

Even though this was the first day in which foreign buyers were permitted to purchase up to 50 per cent of listed companies shares, overseas buyers were keeping well away. One broker described the decision to open the market further to foreigners, a few days ahead of schedule, as "another Korean joke".

Whilst his country's economic crisis was deepening by the minute, President Kim Young-sam addressed the nation on television. Looking sombre, he said: "I cannot find the right words to apologise". This is not his first attempt to take the blame for Korea's financial chaos. He also apologised for the national humiliation of having to accept the IMF's rescue package.

The crisis of confidence in the Korean economy was not helped by uncertainties surrounding next Thursday's presidential election. The leading opposition candidate Kim Dae-jung has promised that he will renegotiate the deal with the IMF if he wins. Mr Kim is a veteran campaigner who could pull off victory in the volatile atmosphere now prevailing in Korea.

Even if he does not win, a high vote for Mr Kim will put pressure on the new executive to adopt a more aggressive stance in Korea's already fraught dealings with the IMF.

The news from Korea was sufficient to trigger an outbreak of jitters across the region. Malaysia, where the stock market dived by some 7 per cent, was worst-affected, as the government warned of bank closures. In Hong Kong blue chip share prices slid back by almost 5.5 per cent as interest rates started to rise again and there was renewed talk of pressure on the Hong Kong dollar.

Ironically the stock market most affected by the Korea crisis, the Japanese market, responded the least negatively. The key Nikkei 225 index shed just 2.5 per cent of its value, and this was mainly related to Japanese domestic considerations.

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