Now let's see how the crisis began in 1997, December. This diagram summarized the backgrounds of the outbreak of the crisis in Korea. Let's first start with the corporate sector of Korea. The Korean corporate sector kept on investing a lot of money into the expansion of the existing industries, and they relied mostly on bank loans. And, as we have seen in the previous lecture, a lot of large companies who suffered from heavy loan, actually went bankrupt by 1996 and 1997. And, when one large company goes to bankruptcy, the commercial banking sector who provided this loan to this large company, they suffered heavily. So, more and more non-performing loans were mounting in the commercial banking sector. So, the corporate sector and the banking sector were getting worse and worse by the middle of the 1990s. And what really triggered the crisis was the external sector. As it was already mentioned, current account deficit was increasing and we had to rely on foreign debt to finance this deficit. And this time the foreign debt was provided mostly in the short term. That was the critical difference between 1997 crisis and the difficulty we had in 1980. In 1980 we had a similar situation, current account deficit, mounting foreign debt. But we could avoid bankruptcies and defaults in 1980 because at that time, the proportion of short term foreign debt was not as high as 1997. Also, the opening of our capital market was a little bit too premature. Simply speaking, many players in Korean capital market were not quite ready to engage in international investment. After the result, capital market players in Korea. They borrowed too much money from commercial banking sector of advanced countries, and especially they borrowed in the short term and they provided this money to Korean domestic companies in the long term. This mismatch between short term borrowing and the long term lending was another critical factor behind the crisis. And lastly, the contagious effect from South East Asian crisis. In the summer of 1997, Thailand and Indonesia went into crises ahead of Korea. At first, we believed that Korea would be intact from this South East Asian crises, but it turned out that eventually the contagious effect of this Southeast Asian crisis has inflicted the Korean economy. And when international creditors began to doubt about the capability of the Korean government to defend the Korean exchange rate, they began to withdraw their money from Korea. Once it began and saw that all of a sudden, one by one foreign creditors, they wanted to get their money out of Korea. And by December 1997, after losing most of the foreign exchange reserve, Korean government simply had to give up. And we had to ask IMF to provide rescue fund. If you look at this table, this table shows how serious the down performing loan problem was in Korea. Look at the number in 1999. We have two numbers here, 8% percent and about 14%. 8%, that's the ratio of nonperforming loan according to the old standard. However, Korea changed it, the definition of nonperforming loan, in 1999 according to the international standard. Now according to this new international standard, you have almost 14%. It shows how dangerously high the non-performing loan was at that time in Korea. And as falling creditors, especially foreign bank, refused to extend the loan. Korean government simply had to use the foreign exchange reserve in order to pay back the loans. And once we, almost, deplete our foreign exchange reserve, we simply had to go to IMF and ask for bailout. And that's exactly what happened in December 1997. And IMF hastily set up the rescue fund. It has more than $50 billion, and about half of that were provided by IMF and World Bank, and the other half provided by foreign government. And with this rescue fund, Korea could avoid national default, but we had to go through painful economic reform following the guideline of the IMF. And those reforms in the recoverywill be covered in the next lecture.
