BBC Economics Correspondent, Peter Morgan: Crisis could have far-reaching repercussions (1'10")

The financial crisis in South Korea has worsened dramatically, with the currency reaching its lowest-ever level against the dollar and the country's new leader talking about 'national bankruptcy.'

The won lost 15% of its value to fall below 2,000 to the US dollar within minutes of the beginning of trading. The currency has lost more than half its value this year.

The won hit an all-time low

South Korea is the world's 11th largest economy. Once hailed as the leading Asian tiger, the crumbling South Korean economy has created a crisis of confidence not only for national investors but those throughout the region.

South Korea's crisis stems from foreign creditors' reluctance to roll over the country's more than $200bn in debt. The World Bank is considering a $3bn emergency loan to avoid a default, which financial analysts say would have disastrous consequences.

Jeremy Hawkins, chief economist with Bank of America: Korean troubles a threat to the regional economy (2'03")

"Korea [is] having immediate knock-on effects around the region," said Jeremy Hawkins, an economist with Bank of America.

"If we were to see Korea actually default, then it's safe enough to assume that we're going to see the same sort of attitude among investors in the region as a whole," he said.

No-confidence votes fuel decline

Brokers and dealers said the markets slid as confidence in South Korea was shaken by comments from President-elect Kim Dae Jung and further downgrades by Moody's Investor Service and Standard & Poor's.

"We don't know whether we could go bankrupt tomorrow or the day after tomorrow," Mr Kim said.

The holidays are no time to relax this year

"I can't sleep since I was briefed [about the financial situation]. I am totally flabbergasted."

Mr Kim has a valid excuse for his misplaced optimism, as the outgoing government had concealed the scale of Korea's difficulties.

A spokesman for the president-elect's party later said Mr Kim's remarks on "national bankruptcy" had been misunderstood.

"The president-elect did not mean there was a real possiblity of a national bankruptcy but wanted to express his willingness to undertake restructuring with sincerity," said Kim Min-seok, senior vice-spokesman for the National Congress for New Politics party.

Analysts say much mystery still surrounds South Korea's debt picture and the unknown factor is spooking the markets.

"There's too much cloak and dagger stuff. Only [the government] knows how dire it really is. But the exchange rate is saying how the markets feel how dire it is," said one analyst with a foreign brokerage.

Consumers prepare for the worst

The holidays have brought little cheer to South Korean consumers as the financial crisis continues. According to the BBC correspondent in Seoul, never in their worst nightmares would South Koreans have imagined that their currency could sink so low.

Koreans are cutting back on consumer goods, travel, investment and other spending, bracing for unemployment, higher taxes and an economic slowdown.

Domestic sales and the number of outgoing travelers are estimated down 30% compared to last December.

There is one notable exception to the parsimony: Koreans are hoarding imported foodstuffs to hedge against price increases in the coming months.

Sugar, wheat flour and cooking oil were wiped from the shelves of some supermarkets last week.
 

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