Korea was progressing well in 1996 and had become a part of the Organisation for Economic Cooperation and Development (OECD). As people celebrated, nobody knew of the impending disaster about to strike. During the latter part of 1996, the current account deficit increased to 5% from previous year’s 2%, a decrease attributed to lessened competition among Korean industries. The GNP declined from 14.1% to become 7.1% and foreign debt rose to a high 100 billion dollars. These and various other debt related indicators were showcasing the upcoming crisis for Korea. The first half of 1997 surfaced a few more indicators of the disaster. Foreign investors in Korea were starting to get wary of the market and lacked confidence in investing because of long recessions, large deficits in current accounts and growing short-term external debt. In January 1997, Hanabo Steel, the 17th largest Korean seller went into bankruptcy. Soon the Sammi Group, another steel company, failed and major affiliates of the Jinro Group went bankrupt. In July 1997, another major automobile manufacturer, Kia motors failed. With the downfall, foreign capital began to flow out of the country. In July 1997, the Southeast Asian crisis broke out first in Thailand, followed by Indonesia, Malaysia and in Hong Kong in October as the stock market crashed. Within October to December, the Korean economy crashed by 112% compared to the US Dollar. ...
Within October to December the Korean economy crashed by 112% compared to the US Dollar. From October 1997, the yield spreads of the global bonds of Korean Development Bank (KDB)3, Korea's indicators of the sovereign risk premium, started to jump. By early December, Korea's bonds were reassessed by Moody's and Standard & Poor's and were demoted to junk bonds from their A1 status.
Soon the banks could not renew the maturing loans and needed to withdraw from the Korean markets. Foreign lending crashed from the $100 from January to October 1997, to minus $20 billion by the end of the year. The won plunged lower to 50% in a span of two weeks in the month of November. As of November 1997, foreign reserves were seen to stand at 24.2 billion dollars, of which only 9.3 billion dollars was finally available. The figure was much lower than the required foreign reserve level of 36 billion dollars. Korea did not have enough money to repay back its 10 billion dollars short-term borrowings. At the edge of sovereign default, foreign debt touched highs of 119.7 billion dollars and the whirlpool of the crisis was pulling in Korea.
The Causes and effects of the Crisis
The causes that led up to the crisis were many and experts state that a single cause cannot be pinpointed as the culprit. While the economy crashed along with that of other nations, many experts also state that the currency crisis in Korea is quite different from other traditional situations. This crisis had little to do with the mismanagement of monetary and fiscal policy. The macroeconomic fundamentals were also good. The effects were as diverse too, but boiled down to the financial destruction of Korea. However like every failure or