By Lee Sang-jin
In the European Union, the Greek sovereign debt problem is a hot issue. If it triggers fears of a default in Ireland and Italy as well, the crisis could rapidly spiral out of control.
Therefore, the European Central Bank with the help of the German and French governments is trying to hammer out a way to forge the Greek national debt into a manageable form. It may be useful to compare and contrast the underlying causes of this crisis for the current EU countries in question with Korea in 1997, and the course of action to cope with each crisis respectively.
Sovereign debt is the amount of outstanding money borrowed by a government to fund its expenditure that cannot be raised through taxation. The Greek government’s successive adhesion to popular sentiment for extravagant social welfare, which the country could ill afford, while failing to collect sufficient taxes to fund these schemes, has caused the country’s debt to spiral out of control.
The total government debt has reached 347 billion euro, or 150 percent of its gross domestic product (GDP). In contrast, the 1997 Korean financial crisis was due to a lack of liquidity, caused by serious mismatches in maturity of sovereign debt and currencies. This is different from a traditional balance of payment crisis as in Greek.
The Korean financial sector liberalization in 1990s led to exceedingly high short-term foreign currency debts in financial institutions, which accounted for 61 percent of total external debts in 1996. The volatile short-term external debts triggered the Korean financial crisis, unlike that currently taking place in some EU countries.
However, there are common features in the development of the two crises. In 1997, the currency crisis in the Southeast Asian countries was aggravated by a region-wide contagion of fears made by American and Japanese banks’ refusal to roll over their short-term loans to Korean financial institutions.
The Korean government depleted its limited foreign currency reserves to help pay their obligations. Likewise, international banks suspended lending the Greek government and financial institutions further monetary assistance. Additionally, uncertainty about the level of toxicity in sovereign debts froze the financial market.
During the process of rescheduling the debt, both countries were requested to take austere measures: to sell or restructure firms and banks; to cut government spending drastically; and to charge extraordinarily high interest rates on debt, well above the prevailing six-month LIBOR interest rate.
Koreans witnessed many divergences in addressing its sovereign debt and default issue when compared to the Greek case. At that time, Korea was seemingly doing fine in the economy: an annual rate of 7 to 9 percent GDP growth; the foreign debt was less than 30 percent to GDP; and a balanced state debt.
In finding a way out of the financial dilemma, the Korean government decided to inject public funds to rehabilitate financial institutions. The public funds were raised through bonds issued by governmental agencies. The Korean government had a leeway to go with certain financial initiatives and relied on the International Monetary Fund (IMF) plan and much-needed interventions by the U.S. government.
In comparison, there is no guarantee Greece can eventually pay its bills on its own. Without this, international banks do not want to continue infusing funds to bail out stressed public institutions and firms.
In addition to this, the German and French governments do not have authority to print euro to raise bailout funds. In the absence of a single fiscal authority and unified budget, the EU experiences a hardship in achieving the accordance necessary for purchasing Greek sovereign bonds. Thus, a path to solving the Greek sovereign debt will be and should be different from that of the Korean financial crisis.
There is more to say in accepting the responsibility for the crisis and bearing the burden of the salvage. Korean political leaders at that time did not avoid taking the blame for the outbreak of the crisis, and its people willingly and voluntarily sacrificed themselves for the recovery of the economy in spite of great hardship.
Korean people queued for hours to donate their gold treasures to help save the economy in trouble. In contrast, an apparent “moral hazard” would be a stumbling block to Greece. In early November, the Greek prime minister announced to put an EU rescue package for Greece to a referendum vote, which brought turmoil to the world stock market and fears of triggering an EU-wide financial collapse.
Many Greek people protested against and refused austere measures included in the rescue package. Under this circumstance, it is unlikely for the EU crusade to get its bailout funds’ worth. If the Greek moral hazard continues to survive, I bet good money that this crusade ends in failure.
Lee Sang-jin is director general at the Industry Policy Bureau of the Prime Minister’s Office. He is in charge of policies for industry in general, small- and medium-sized enterprise, intellectual property right and broadcasting and telecommunications.