留意韓國

www.reuters.com
Will $7 billion debt plunge Korean won into crisis?

SINGAPORE (Reuters) - A seemingly insignificant event -- the maturing of $7 billion worth of foreign holdings of South Korean bonds this month -- is threatening to plunge the north Asian country into a full-blown currency crisis.

The amount itself is tiny, under 3 percent of South Korea's $247 billion in currency reserves.

But the government debt is maturing at a crucial time. The won is already extremely weak, there is growing speculation that the Korean authorities have dropped their defense of the currency and simmering rumors that the government holds huge amounts of worthless U.S. agency debt.

Suddenly, the issue of a small amount of maturing bonds has transcended into more complex fears about the central bank's credibility and ability to defend its currency.

As the won plunged 3 percent to 4-year lows on Monday, it appeared the damage had already been done. The market buzz was capital flight. The stock market fell 4 percent.

"It's not a great deal, but it is the trigger effect," said State Street strategist Dwyfor Evans, referring to the maturing bonds.

"If people think money will be taken out of the country, it will inspire them to put on short Korea positions.

"Then there are technical levels, stop-loss levels and, before you know it, there's a momentum to the whole move driven primarily by speculation over the maturing bonds."

But economists place the blame for letting the situation deteriorate to such an extent squarely on foreign exchange authorities, which in South Korea's case is both the finance ministry and the Bank of Korea.

Until August, their steadfast intervention had convinced market players that the won will not be allowed to decline past the 1,050 mark per dollar at any cost.

The Bank of Korea is estimated to have spent about $10 billion defending the won in July, and double that amount if the drop in its forward positions is also taken into account.

But, in early August, the government hinted it may not intervene that aggressively. That spurred speculators into thinking the authorities will let the won weaken, either because they want a buffer for their exports or because they are loath to spend more of their reserves.

As Korean bonds, stocks and the won tumbled on Monday, the situation was an uncomfortable reminder of the capital flight seen in the 1997/1998 Asian financial crisis when the won plunged to near 1,900 a dollar from near 900 -- losing half its value.

"They have to do what they did in early July," said ING Bank economist Tim Condon. Nothing else but heavy-handed intervention would work at this point, he said

"The last thing they need now is a disorderly decline in the currency. There is no upper limit on dollar/won and investors can get unnerved."

READING THE GOVERNMENT'S MIND

But the reasons for the central bank's indifference to the won's decline through August remain a mystery.

The won is already Asia's weakest currency this year, having lost 16 percent of its value against the dollar so far. South Korean exporters are faring relatively better than their competitors in Singapore and Taiwan, with exports expanding at a pace above 20 percent from year-earlier levels.

Although the trade account has been widening since the start of this year, that by itself provides no justification for a run on the won.

The question then becomes how liquid the government really is.

Korea's short-term debt is high, at $222 billion, but 40 percent of that is debt owed by local branches of foreign banks.

There have been heavy outflows. Foreigners have sold a net $23 billion of Korean equities this year. But the bond market remains an attractive trade for foreigners, with yields at nearly 6 percent even at the short end.

The scary possibility that investors will flee the country in droves had not seemed real.

Until Monday, that is, when the central bank's seeming reluctance to support the won transcended into panic-like concerns over liquidity and faith in the won.

"There doesn't seem to be any love for Korea at all at the moment," said Evans

"We've got the potential to unwind a lot of the secular bull run that we've seen in these Asian currencies all of this decade and it looks as if Korea is at the fore of all the countries and currencies that are at risk."