FOCUS-Asia contagion spreads as S.Korea won plunge
HONG KONG, Dec 11 (Reuters) - A sharp plunge in the South Korean won on Thursday spurred weakness in Hong Kong and
Taiwan, proving that even the region's healthiest economies were falling victim to Asian currency contagion.
''Hong Kong and Taiwan are not immune. They have their own set of problems,'' said Daniel Lian, head of Asian markets
research at ANZ. ''Given the tremendous trade linkage to Hong Kong and the rest of Asia it is very hard to justify these two
currencies staying immune.''
The South Korean won nosedived at the open, reaching the 10-percent limit-down within the first four minutes of trade.
The free-falling won shook the Hong Kong dollar off its perch at HK$7.7450/7480 as rates soared. The Hang Seng stock index fell
more than six percent to 10,305.61 points.
The Taiwan dollar was also sharply softer, and sentiment remained poor with Taiwanese stocks off 2.74 percent at midday. Some
were forecasting at least another 10-percent slide in the Taiwanese currency from current levels at T$32.523.
''There are limits to everything but I don't know what's going to stop this,'' said Eric Nickerson, managing director of currency
research at Bank of America.
Concern was mounting that South Korea had now hit a debt wall, and that it continued to procrastinate over implementing a record,
US$57 billion International Monetary Fund program in the absence of foreign exchange reserves.
''I don't see this stopping unless the rules of the game are changed -- and people are getting nervous about that as well,'' said
Nickerson.
But capital controls were unlikely to have much effect, given that demand for U.S. dollars to meet debt repayments rather than
speculation was behind the currency weakness.
Callum Henderson, managing analyst at MMS International, warned that any failure by South Korea to restore confidence would
lead to a systemic collapse of its banking system.
This would stretch beyond Northeast Asia, and probably prompt a one-session drop of 1,000 points from Japan's Nikkei 225 index
and a 500-point slide in the Dow Industrials.
"Every market in the world would go down," Henderson said.
But Nickerson warned that even the fear of a systemic banking collapse in Korea could prompt traders and fund managers to
re-open books now closed for year-end in order to raise cash aggressively and avoid a major shake-out.
''The upside gains between now and the end of the year are far smaller than the downside risks, which are obvious because we've
seen them for the last couple of days,'' Nickerson said, referring to Asia-linked slides in the Dow Industrials.
''And this is not just Asia, it's the U.S., Europe and all markets that have been posting strong gains.''
South Korea's looming presidential elections next week and concern about implementation of the IMF programme topped market
worries, but there was also scepticism about the integrity of published levels of short-term foreign debt, which Korea confirmed
this week were US$100 billion rather than US$67 billion.
''If they've got that wrong, either deliberately or not, what else have they got wrong?'' said Henderson. ''If they restate to US$100
billion, hey, maybe it's US$200 billion.''
Markets were also reacting to a debt rating downgrade by Moody's Investors Service Inc and the prospect of a huge, US$2.0
billion 10-year bond launch by Korean Development Bank. Traders said a new KDB bond suggested Korea wanted to borrow its
way out of difficulty rather than bow to IMF discipline.
All these factors had pushed the won into overshooting territory, analysts said.
Sentiment would dictate future moves, which would be exaggerated by thin liquidity. Sentiment was also responsible for Northeast
Asian contagion rather than fundamental links.
''There is no direct, fundamental link to Korea. What they are looking at are the absolutely horrifying problems in Korea and
thinking maybe there are problems here,'' Nickerson said.
Lian said that while Hong Kong and Taiwan did not have the high levels of foreign debt that prompted sharp depreciations in other
Asian nations, they were both leveraged economies.
About 30 percent of Taipei's stock market was margin trade, while Hong Kong banks were exposed to an inflated and rate
sensitive property sector that accounted for about one-third of Hong Kong's stock market capitalisation.
The Japanese yen was relatively steady, its trading dictated more by domestic issues than the won, dealers said.
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