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South Korea Hears Echoes of 1997 in US Financial Crisis

South Korea's currency and stocks have taken a beating this week following the financial crumbling of another major US financial institution. For many Koreans, the crisis appears quite similar to what they experienced 11 years ago but this time, some say Washington appears to be changing its prescribed remedy.

South Korea's main stock index, the KOSPI, dipped to its lowest point in a year and a half this week, amid worries over a string of major bank failures in the United States, including the collapse of Lehman Brothers, one of the country's largest investment institutions. South Korea's currency, the won, plunged against the dollar as central banks around the world pumped $180 billion worth of cash into credit-starved markets.

South Korea's economy is the world's 12th largest, and depends heavily on exports, especially to the United States. That makes this country extremely vulnerable to international crises but it has also helped Seoul build up substantial reserves of U.S. dollars as a cushion against turbulence.

South Korea's finance minister said this week the country has enough reserves to inject into the market as needed. However, some economists note Seoul's reserves have dropped by nearly ten percent since March, and may not be sufficient to deal with a protracted period of crisis. Lee Seong-tae, governor of South Korea's central bank, warned lawmakers this week it remains what the impact of the global crisis will be.

Koh Yu Seon is an analyst with Daewoo Securities here in Seoul. She says the current meltdown on Wall Street closely parallels the economic crisis South Korea and Asia experienced in 1997.

She says American investment banks have made excessive loans, which created a real estate bubble and made the lenders insolvent on bad debt. That, she says, is similar to what happened in South Korea, where enterprises borrowed excessively to chase bad investments.

Many South Koreans refer to that period in common speech as the "IMF crisis, in reference to the International Monetary Fund, which, with U.S. support, loaned South Korea about $20 billion, but, as Koh recalls, imposed austere conditions that limited the country's economic flexibility.

She says, the U.S. viewed bankruptcies as inevitable to get rid of inefficiencies and solve South Korea's financial problem. We had a chain reaction of them here, she adds. But now, she says the United States is taking a completely different set of actions because it wants to avoid paralysis of the entire financial system.

U.S. officials draw a distinction between the $20 billion IMF bailout of South Korea and Washington's more than $250 billion bailout of U.S. financial institutions. U.S. banks and insurers do business all over the world, and their problems can rapidly spread to the global entities that are exposed to them. By contrast, the negative influence of South Korean bankruptcies was confined mainly to Asia.

Many ordinary South Koreans view the IMF rescue period as a humiliation imposed on their nation from outside, but the country paid back the loan and recovered far more quickly than many expected. Still, economists warn if Washington does not draw a line in its rescue of faulty lenders, it could lose credibility in preaching tough free market medicine abroad in the future.