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The Asian Financial Crisis — 1997 to 2000

The Korean Debt Rollover of 1997

Explain why South Korea's banks faced a run by foreign lenders in late 1997, why the IMF loan and high interest rates did not stop it, and what ended it.

Before you start

What you'll be able to answer

  1. Why did South Korea's banks face a run by foreign lenders in late 1997?
  2. Why did the IMF loan and high interest rates not stop the run?
  3. How was the run on Korea's banks stopped?

Where this sits

The Asian Financial Crisis — 1997 to 2000 · this module is lit

  1. 2 Jul 1997Thailand stops holding the baht at a fixed rate to the dollar and lets it float
  2. 14 Aug 1997Indonesia lets the rupiah float
  3. 20 Aug 1997The IMF approves a loan of about $3.9 billion for Thailand
  4. Nov 1997The IMF approves a loan of about $10.1 billion for Indonesia
  5. Nov 1997Indonesia closes 16 banks
  6. 4 Dec 1997The IMF approves a loan of about $21 billion for Korea
  7. 24 Dec 1997Korea's programme is speeded up
  8. 21 May 1998President Suharto of Indonesia resigns
  9. Aug 1998A crisis in Russia spreads panic beyond Asia
  10. 1-2 Sep 1998Malaysia brings in rules on money leaving the country
  11. 1999Growth returns in most of the region

In late November 1997 South Korea was running out of usable dollars

On 26 November 1997 a team from the International Monetary Fund (IMF), which lends to countries that cannot pay their foreign bills, arrived in Seoul to agree a rescue for South Korea. It found that Korea's usable reserves were around 11 billion dollars and falling very fast, the IMF's Independent Evaluation Office, the IMF's own watchdog, records. Usable reserves were the central bank's dollars and other foreign money, minus what it had deposited with Korean banks' branches abroad to help them repay their debts.

Predict first

Something was draining Korea's reserves fast. What do you expect it mainly was?

Korea's banks owed most of the short-term foreign debt

Korean banks had borrowed heavily abroad in dollars, often through overseas branches, for a year or less. When such a loan fell due, the lender could roll it over, renewing it, or ask for its money back. A dollar debt has to be repaid in dollars, so a bank holding won, Korea's currency, must sell won to buy them. The central bank supplied some banks with dollars from its reserves, through deposits with their branches abroad and through loans. Branch borrowing was at first left out of the count. Corrected, banks owed 62 billion dollars of Korea's short-term foreign debt at the end of September 1997, nearly three-quarters of it, the evaluation office estimates.

A lender on a short-term loan can demand repayment when it falls due. Once some lenders do that, the rest are pushed to follow, the office explains, much as in a run on a bank.