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Briefing

  • 11 / 11 / 2008
  • Financial Times interviews FSC Chairman

  • Jun Kwang-Woo, Chairman of the FSC met with Financial Times for an interview on November 11th to discuss current Korean economic conditions and the government's policy plans.

    Interview Contents:


    Hello I'm John Authers, Investment Editor at Financial Times. I'm in Seoul the Capital of South Korea where we're going to be talking to Jun Kwang-Woo who is the Chairman of Korea's Financial Services Commission and as such he's the chief regulator who's in charged in navigating a course for Korea through the financial crisis of the last two month.


    Q: Mr. Jun, thank you very much for being with here us today.

    A: It's nice to be with you.


    Q: A couple of month ago there was a very big deal of attention in the international press that the Korea Development Bank was considering taking a stake in Lehman Brothers and of course Lehman Brothers demise came quite soon after those talks ended. You played a role in discouraging the KDB from taking the stakes. Could you take us through what factors you took in to account, why you took stance you did, in an obviously high profile situation.

    A: From the beginning, it wasn't easy or even appropriate for a state bank like KDB to pursue a cross border M&A that involved a very large international investment bank given the complexity of the deal and given the political sensitivity as perceived in Korea, when a state bank and state agency involved in such a deal, it cannot be judged simply based on financial merit alone. Because we have to consider all the implications and related risks and giving thought to those issues related to the deal I felt that it wasn't quite appropriate for KDB to be further engaged in the deal. So I think we made the right decision.

    Q: Just to make it clear, it was less to do with any judgment as to the health of the Lehman Brothers at that point, it was to do whether it was strategic, whether it was right thing for KDB to be doing it.

    A: I can tell you that I have great admiration, personally, for Dick Fuld, a great Chairman. But simply KDB I felt was in a way too small a boat to get involved in saving a titanic like Lehman Brothers.


    Q: What we've experienced in this country in the last few months on the surface looks very similar to what happened to Korea in 1997. We had another obvious financial crisis involved a sharp depreciation for the won. Do you think that Korean financial market broadly speaking hit harder than it was justified by the economic fundamentals therefore I believe that Kospi benchmark index fell by something like 2/3 from top to bottom in dollar terms.

    A: First of all, in local currency term, in fact, Korean market did pretty well; one of the best in Asia. But, aside from that I would like to say that Korean market has been hit hard compared to its economic fundamentals. I think mainly because of large capital outflows in the aftermath of this sub-prime problem, especially Lehman collapse. Because of the large fall out of equity markets around the world, foreign investors wanted to sell their shares in relatively liquid Korean market to meet their liquidity needs at home.

    I think in retrospect, Korea¡¯s complete capital market opening since the financial crisis 10 years ago has been mixed-blessing, because we had too much of a good thing at some point; large capital inflows. But when global economic environment and market conditions deteriorated, it became not so much a blessing because of the large capital outflows. So that was the down-side of the capital account liberalization, I suppose.


    Q: The government did announced last month a big series of measures to support the financial sectors particularly with regard to small and medium sized enterprise here in Korea. Do you think that has done enough to stabilize the financial markets and stave off a risk of recession here in Korea?

    A: We think that it's sufficient at this time, nevertheless, I must admit that it depends on how the global economy evolves of the next several month and year or two. Because if global economic down turn is more severe than we than envisioned at this time, then we should prepared to do more to support the economy. And for that matter, I would like to re-emphasize that Korea is in good shape in terms of fiscal position.
    Now that is very important because with the continuing fiscal surplus of all the years and with relatively low gov't debt to GDP ratio perhaps the lowest amongst OECD countries. Korea is well equipped to provide fiscal stimulus programs to support, not only real economy, but also the financial sector in Korea.


    Q: There is still great concern that the Korean financial sectors seems to be more dependent on foreign currency funding particularly dollar funding. Are you confident even if this crisis wasn't this time made-in-Korea, that the financial sectors will be able to deal with problems now hitting it?

    A: Well, it is true that Korean banks have expanded their lending operation quite aggressively over the last two, three years time span. In doing so there was a lot of foreign borrowing. But I'd like to point out that ¡°A¡± – more than half of the foreign borrowing was carried out by local brunches of foreign banks. ¡°B¡±, much of the foreign borrowings was to support booming export sectors, which also implies that there hasn't been really much maturity or duration mismatch between the foreign borrowings and foreign currency lendings. It's broadly matched between assets and liability. So it's not really that big a concern than some may think.


    Q: Korea opted against recapitalizing of banks where various other jurisdictions have resorted to that. Do you think it was a correct decision?

    A: At this time, yes. Because unlike many commercial banks in advanced countries, notably the United States and some European countries, our banks direct exposure of lost related to sub-prime problems is very limited. And their capital position is by no means in a position to ask for government direct help. It is essentially up to shareholders to approach the government for our direct support and none has advanced that way and when we to talk to them, they are not ready to entertain any of such initiative at this time. So we are thinking about some preemptive, preventive measures ourselves but I don't think it will be needed in the foreseeable future. But we will be prepared if necessary to provide support along that line.


    Q: But at the moment, you believe it won't be necessary to do recapitalizing along the line.

    A: Not at the moment.


    Q: U.S Federal Reserve announced that it was providing a swap-line to make it easier to access dollar funding, a facility that was also only allowed to Singapore, Brazil and Mexico as well as South Korea. Could you take us through how important that is, what's the significance of that step is, and also, is there any questions of making recourse to the IMF, or is this Federal Reserve now going to be a more important part there?

    A: I think Korea's position in the global economy has been in a way solidified, supported by the United States central bank which gave a very important signal to the market.

    That was on top of one hundred billion dollar gov't guarantee program for bank borrowing, which was also very significant. So as of now, I think we have a sufficient support from the government and the U.S. Fed to have enough cushion to deal with the foreign exchange need, down the road, on top of more than two hundred billion foreign exchange reserves.

    And, also very recently, a welcoming turnaround of capital current account situation – now we have a current account surplus - this latest monthly figure from October. So all things considered, I don't think this is in any way to think of even IMF arrangement, at least at this very juncture.


    Q: You got a number of very large of foreign private equity firms such as Blackstones that is currently in Korea looking for distressed assets with the help of Korean National Pension System. How do you feel about the increase role of private equity funds, or is this similar to the kind of vulture investing that went on after the 1997 crisis, or are there any key areas of difference this time?

    A: Different types of investors serve different purposes. And I do welcome all foreign investors, regardless of their investment priorities and their investment horizon. That's our government¡¯s position and we continue to appreciate active participation by foreign investors. For that matter we would be ready to treat all foreign investors equally like domestic investors.


    Q: One problem that you might have in attracting private equity finance is that not all international private equity investors had the greatest of experiences in Korea for the last time around a decade ago. What can you say to reassure any private equity investors who are watching this that this time it would be different that the environment is better than it was 10 years ago?

    A: Over the last 10 years, we have seen different governments managing important finance economic policies. Certainly what I can tell you at this time is that the new administration under the leadership of President Lee Myung Bak has a clear policy stance to appreciate and welcome all foreign investors. We create a level playing field for foreign investors to be active in Korean Financial market, and we also encourage Korean financial institutions to go abroad. So I thinking achieving financial globalization in Korea has to be carried out in two ways; welcoming foreign investors inward; and encouraging our institutions go outward. And we very much pursue this policy as a policy priority through out this administration.

    ---

    I've been to talking to Jun Kwang Woo, Chairman of Korea's Financial Services Commissions.
    I'm John Authers, Investment Editor of the FT.



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