Korean banks

Published: October 6 2008 09:39 | Last updated: October 6 2008 12:07

S. Korean banks struggle to raise dollars

On the basis that public funds seem to be going into banking systems in broadly alphabetical order – starting with America, Belgium, Germany and last week moving to Iceland and Ireland – it looks like time up for Korea. And right on cue, Asia’s fourth biggest economy is exhibiting signs of panic. On Monday, Korea’s finance minister urged banks to sell overseas assets to raise foreign funds and promised them access to the country’s foreign exchange reserves. Short term funding rates jumped to a seven and a half year high, while the won, one of the world’s worst performing currencies, fell a further 5 per cent against the dollar.

Korea was always Asia’s most obvious trouble spot for financial contagion. Companies, banks and households are horribly over-leveraged: private sector debt as a percentage of GDP stands at 180 per cent, above the US. Banks, unusually for Asia, lend far more than they take in deposits and are reliant on offshore markets for around 12 per cent of funding. Meantime, their penchant for lending to the vast but ailing small and medium enterprises sector raises the prospect of a jump in non-performing loans. Households also look vulnerable. Korea is primarily an export nation, and stalling global demand will quickly feed through to lower corporate profitability and job losses.