Thomas don't know if you have been following Korea. Deflation once started tends to follow the first law of physics. A trend once in motion....
This is not good.
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Korea
As Debts Mount, Experts See A More Severe Crisis Ahead
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By Don Kirk International Herald Tribune
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SEOUL - South Korea risks a second financial crunch that could eclipse the crisis that began late last year when the nation came close to bankruptcy, financial experts warned Thursday.
Corporate debts are mounting rapidly, according to specialists here, while the government lags behind in carrying out far-reaching reforms demanded by the International Monetary Fund as a condition for putting together a rescue package of nearly $60 billion last December
''The possibility of a credit crunch can lead to a default risk in Korea,'' said Kim Jun Kyung, one of the authors of an extensive analysis of the economy released by the Korea Development Institute, a government research institute.
Separately, in a report released Thursday, the Asian Development Bank said it expected the economies of South Korea, Thailand and Indonesia to shrink this year, slowing growth around the world.
The bank's annual Asian Development Outlook report also warned that speculators might soon attempt to devalue the Hong Kong dollar and the Chinese yuan on foreign-exchange markets. ''The success with which the authorities defend these exchange rates will have important implications for the recovery of the Asian economies,'' the bank said.
Additional coordinated assistance from the world's big economies and international financial institutions will very likely be required to nurse the economies of Southeast Asia back to health, the report said.
''Failure to address the crisis will not only exacerbate Southeast Asia and Korea's economic problems, but will also undermine the growth momentum in the rest of the world,'' the bank said.
South Korea's gross domestic product will fall by 1 percent for 1998, the bank's forecast, while the gross domestic products of Thailand and Indonesia will decline by 3 percent. Those figures compare with forecasts of increases ranging from 2.4 percent for the Philippines, to 5 percent for Vietnam, and 6.7 percent and 7.2 percent, respectively, for India and China, according to the bank.
Because South Korea is an industrial nation that manufactures a wide range of sophisticated products for world markets, officials here had hoped to avoid comparisons with Thailand and Indonesia, the two less-advanced Southeast Asian countries hardest hit by the regional economic downturn.
South Korea's total debts, according to the report by the Korea Development Institute, are rising steadily as more than 3,300 small and midsized companies declare bankruptcy every month. Those debts now come to about 1,000 trillion won ($727.81 billion). That figure includes more than $150 billion owed to foreign banks, while nonperforming loans are at least 48 trillion won, according to the report.
''The debt situation has been deteriorating, and if it continues there is no way to get out of this crisis,'' warned Jwa Sung Hee, president of the Korea Economic Research Institute, an arm of the Federation of Korean Industries, which is made up of chairmen of the country's chaebol, or conglomerates.
Government officials have contended that the economy has stabilized with the aid of the IMF, international creditor banks and, most recently, a $4 billion government bond issue.
Responding to the sense that the government, banks and chaebol were moving too slowly on pledges to restructure the economic system, the stock market has been falling all week.
On Thursday, share prices fell to their lowest level since the worst days of the economic crisis in December. The Korea Stock Exchange closed Thursday at 416.54 points, down 15.27 points, or 3.54 percent, from Wednesday.
''The current situation could be worsened in the wake of the consecutive collapse of insolvent businesses and mass unemployment creating social unrest,'' said Kim Woo Choong, chairman of Daewoo Group.
''There is still a danger of industrial collapse as we witness the unexpected demise of one business after another regardless of their size and competitiveness,'' he told a forum sponsored by the Financial Times newspaper.
The need to get rid of bankrupt firms is universally recognized here, but the question is how to do it. ''In order to survive, firms may have to have distress sales of assets,'' said Kim Jun Kyun, the author of the report released by the Korea Development Institute.
Mr. Jwa of the Korea Economic Research Institute said major companies had ''very much underestimated the situation'' while going deeper into debt.
With domestic sales decreasing by 15 percent this year, Mr. Jwa called for increased exports as the best way to cover the gap. Analysts noted, however, that South Korea's strongest export product, semiconductors, is struggling against sharply declining prices abroad while another strong export, motor vehicles, faces sluggish sales in a stagnant world market.
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