November 21, 1997
The annual Asian Pacific Economic Cooperation meeting (APEC) begins in Vancouver this weekend. World leaders will consider what to do about the growing financial crisis in Asia. An international investment analyst explains the details of the South Korean bailout, and the President of the Philippines talks about the challenges facing his country's economy.
MARGARET WARNER: South Korea is the most developed country in the world ever to seek an IMF bailout. Here to tell us more about it is Robert Hormats, vice chairman of Goldman Sachs International. How did South Korea--one of the most developed countries in the world--Asia or the world--get into this fix?
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The Korean crisis: local and global.
ROBERT HORMATS, Goldman Sachs International: Well, what happened is a lot of big Korean companies borrowed a lot of money. Some of them now have gone bankrupt, which means that the banks in Korea are left holding a lot of assets on their books that they're never going to be able to collect on. When foreign creditors saw this situation, they held back on new loans. The currency declined, which means that people in Korea who borrowed in dollars will find it's much more difficult to repay the loans that they had taken out to international banks, and it's cascaded from then on--bankruptcies, weak debt, big debt problems, weak banks, and smart creditors becoming more and more reluctant to lend money to Korea.
MARGARET WARNER: Would you say that the reasons have more to do with the financial crisis kind of rolling across Asia, or does the business sector there have a lot of internal problems with management, cronyism and so on that, so many others do?
ROBERT HORMATS: Well, it's really a bit of both. They certainly have internal structural problems. A lot of the loans made by the banks to the big Korean companies were used to build excessive capacity and didn't return very much for the companies. And the banks became more and more at risk. But the crisis, itself, was triggered by the concerns about the currency instability in the rest of East Asia, the reason being that as other currencies depreciate, the Korean won looked less and less competitive. Korean exports looked less and less competitive. And, therefore, the markets began to anticipate that Korea too would have to devalue its currency and, therefore, lending dried up, and people who had loans to Korea began to pull back those loans.
"They didn't want to go to the IMF if they thought they could resolve the problems on their own."
MARGARET WARNER: Now, the South Korean government officials went to quite extraordinary lengths to try to avoid going to the IMF. Why? Tell us about that a little bit.
ROBERT HORMATS: Well, there's a matter of pride. Korea actually is an economy that has done a very large number of things right. There are some very good companies in Korea. The company has managed to reduce--in some cases eliminate--in certain years its budget deficit. Exports actually have been increasing in Korea. So they've done a lot of things right, and there's a lot of pride in Korea. They didn't want to go to the IMF if they thought they could resolve the problems on their own and perhaps get some bilateral assistance from Japan or the U.S.. But now they've concluded--correctly in my judgment--that they have to go to the IMF to get a program to help them address this problem and some external resources as well.
The price of IMF help.
MARGARET WARNER: All right. Now, what does it mean for a country to actually go into these negotiations with the IMF? What price does this country usually have to pay to get the money?
ROBERT HORMATS: Well, you are quite right. There are conditions to getting money from the IMF. Traditionally, the IMF looks at countries and tries to figure out ways by which the countries can stabilize the situation, in some cases limiting the budget deficit. In Korea that's not really the issue. I think the IMF in the case of Korea is going to want a number of the financial institutions to be restructured. Some of them will probably have to go out of business. Some of the bad loans will have to be taken off the books of the banks and put on the books of some government institution, which the Koreans are in the process of doing--a greater degree of transparency so that foreign investors will be able to know what the reserve to the central bank will be able to look at the books of banks and determine whether they're credit worthy or not and look at the books of corporations to determine whether they're credit worthy, whether they're for the banks that have lent them money or in a sound position. So there are a lot of internal structural issues that will be addressed when the IMF and the Koreans begin their negotiation.
MARGARET WARNER: And explain to us or briefly to us when we talk about an IMF bailout, whose money is that really?
ROBERT HORMATS: Well, the IMF gets its money from a number of countries--the United States, Britain, Japan, Germany--a lot of countries contribute money to the IMF, and countries all have quotas. Korea has a quota of about a billion, a little over a billion dollars. And they'll be able to draw that quota, but they'll also be able to draw more than that quota. Mexico got seven times its quota. So Korea will be able to borrow maybe 10, 15 billion dollars from the IMF, maybe a little bit more. They'll also probably need bilateral money from Japan and the U.S. and other countries to demonstrate confidence in the markets, that sufficient money is available if they undertake this restructuring program that I've identified.
The Korean economy has a broad influence on the U.S. and the rest of Asia.
MARGARET WARNER: Now, what is the likely impact, now that the crisis has reached South Korea on the rest of Asia and on U.S. and the rest of the world economies?
ROBERT HORMATS: Well, that's a very important question. If the Korean won can be stabilized and doesn't depreciate, it will help to stabilize the situation in Asia. The danger is that if an agreement is not reached, and if the won depreciates further, that will make Korea more competitive; and other countries in Asia may feel that they have to depreciate their currencies, or the market, itself, will have to depreciate those currencies, so that they'll be able to keep up with Korea in this competitive devaluation process that's underway. For the U.S. the stakes are quite high because Korea's an important market. We export more to Korea than we do to Indonesian, Thailand, and Malaysia combined. We exported about $22 billion to Korea last year, and if Korea deteriorates, it will affect Japan, which is a big market for American products. So if the situation in East Asia continues to deteriorate, growth slows, currencies devalue, then it will reduce American exports and force these countries to export more to the U.S., which will widen our trade imbalance.
MARGARET WARNER: And does the tense political military situation on the Korean Peninsula--does that give the rest of the world, do you think, a greater stake in seeing this thing solved. How does it complicate that?
ROBERT HORMATS: It certainly gives the world a great stake in helping Korea, first of all helping Korea to approve its own situation through the sort of restructuring of financial institutions and bad loans and such. It also means that when Korea does this, the world really has a major reason for helping support Korea. We fought a war to defend the Koreans. We don't want to send a signal to North Korea that we're not supporting the South. We have to look very resolute in supporting the South to avoid sending a signal to North Korea that the West--the United States is not behind the South Koreans. It is a very important geopolitical signal. In addition, the United States has to demonstrate that it still wants to play a strong leadership role in Asia and support from the IMF and support from the United States demonstrate that the world is supporting the South Koreans in this crisis.
MARGARET WARNER: And briefly, before we go, President Clinton and other Pacific Rim leaders are, of course, meeting for this APEC summit at the beginning of the week. What, if anything, can APEC do about this whole Asian financial crisis?
ROBERT HORMATS: Well, APEC, there was an agreement reached in Manila to try to enhance cooperation among the Asian countries and the United States and others--economic support and to encourage reforms in countries like Korea and other countries of the region that are de-stabilized. Then I say it's also to demonstrate that it really wants to continue to be a leader and that it will provide if the Koreans agree with the IMF a substantial amount of money, and that we're a constructive force in the country in retreat from our leadership role in Asia.
MARGARET WARNER: Thanks, Bob Hormats.