Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Most at risk in 2008 was South Korea, whose famous corporate export champions, the chaebol—Daewoo, Hyundai, Samsung—and their giant steel plants, shipyards and car factories suffered a shuddering blow. “We are collateral damage in a crisis that is not our doing,” observed one professor at Korea University in Seoul. “We live in an unfair world.”6 But however real this sense of victimization, it does not capture the complex reality of South Korea’s situation. What set South Korea apart in Asia, and gave it a vulnerability akin to that of Eastern Europe or Russia, was the global integration of its financial system.7 After the shock of the 1990s the South Korean central bank had made sure to accumulate ample foreign reserves—$240 billion by the summer of 2008. But this did not cancel out the vulnerabilities in the Korean financial system. Unlike in Europe, subprime wasn’t the issue. South Korean holding of toxic US mortgage securities amounted to only $850 million.8 The problem was not on the asset, but on the funding, side of the balance sheet. Since the early 2000s, Seoul had promoted itself as a regional financial hub for Northeast Asia. It had liberalized currency and capital flows. A large part of South Korean banking was owned by foreign investors, and Korea’s banks had shifted to the unstable new model of wholesale funding, borrowing short term on global dollar markets to invest long term at higher interest rates in Korea.