A Depressed Mood

In South Korea, golf-club memberships are the ultimate status symbol among the country's newly rich. Limited in number, memberships in the most prestigious clubs trade like prized stocks and often reach hundreds of thousands of dollars. A year ago, the golf membership belonging to Kim Joo Hyong, the chief executive of a small trading firm, was worth $350,000. But as the shockwaves from the U.S. financial meltdown slammed into South Korea in September, Kim nervously watched cash-starved golfers dump their memberships on an Internet site that tracks their value, sending prices plummeting. The country, he became convinced, was about to suffer a financial crisis even worse than the great conflagration that engulfed Asia in 1997, when a near bankrupt South Korea turned to the International Monetary Fund (IMF) for an emergency bailout. Fearing his investment would completely evaporate, he sold the membership in October for $190,000. In 1997, says Kim, "the crisis involved only a few countries. Now it has come from the strongest country in the world. I think the crisis will last a few more years."

Kim's depressed mood is typical of the gloom that has enveloped the world's 13th largest economy. As has happened around the world, the panic that began on Wall Street has seeped into the minds and hearts of South Korean businessmen, bankers and housewives, who fear the consequences of an impending global recession. With the country heavily reliant on exports, South Korea, like the rest of Asia, cannot escape the fallout from a U.S. downturn. Goldman Sachs predicts GDP growth will sink to 3.9% in 2009, the lowest since 2003.

Fresh Wounds
The current financial catastrophe has a special emotional impact on this nation of 49 million people. South Koreans remain scarred by the previous crisis in 1997, with memories of the bankruptcies, unemployment and uncertainty about the future still fresh and painful. In a country where economic success has become an integral part of national identity, the IMF bailout was seen as an embarrassment. Today's financial chaos seems like a return to those tumultuous days. South Korea has been among the Asian countries hardest hit by the global meltdown; its currency, the won, has fallen to levels not seen since the days of the last crisis. Even though South Korea's economy, relative to others around the world, is expected to show some vibrancy — economists expect the country to avoid a recession, while the banking sector remains generally healthy — the renewed onset of economic turmoil has undermined the confidence of South Koreans in their own future. "The economy's O.K., but no one thinks so," says Jeffrey Jones, a Seoul-based attorney and former chairman of the local chapter of the American Chamber of Commerce. "They're saying that not only is the IMF coming back, but that 'we're failing.'"

That fear is palpable on the streets of Seoul. South Koreans have begun to scale back. Song Jae Hyun, a vegetable seller at central Seoul's Nandaemun market, sells his broccoli and bell peppers for only about 50 cents apiece, much cheaper than in many of the grocery stores, but his stall still sees few customers. "People are spending less money for sure," he says, shaking his head. "One year ago, there would be double the amount of people here. These are terrible times." At a nearby restaurant, only four of the 16 tables are occupied at dinner time. "Everyone is concerned about the economy," says Kim Mi Hae, who stands at the cash register. "That's all my customers talk about." Nervous bankers are cutting back as well, by sharply curtailing domestic lending, especially to small companies. This paranoia at the banks can potentially make the coming downturn more severe. "They've created a vicious cycle," says Jones.

The panic-stricken behavior makes perfect sense in light of the nation's recent history. Of all of the amazing growth stories in Asia's economic miracle, South Korea's is probably the most miraculous. In a mere generation, the country transformed itself from an impoverished backwater living on American aid to a globally competitive manufacturer of microchips, cars and flat-screen TVs. Any setback to that progress is taken with grave seriousness. During the 1997 crisis, office workers, too ashamed to tell their families they had lost their jobs, donned business suits each morning only to hide out in the mountainside parks around Seoul. Middle-aged women turned over their gold jewelry to the government in a futile attempt to restock its empty coffers. Today, President Lee Myung Bak has called on that same spirit of self-sacrifice to pull the country through the current crisis. At a meeting of his Cabinet in October, Lee said that the public should "join forces with one mind to tide over the trying times."

As the U.S. financial sector began to teeter in September, South Korea's government believed that it was in a far stronger position than a decade ago. Its financial institutions seemed sturdy, with a mere $70 million of those toxic mortgage-backed securities that doomed banks in the U.S., while the central bank was well stocked with $240 billion of hard-currency reserves — more than sufficient, economists believed, to protect the economy from any external shocks. "We didn't need a special spotlight," says Yi Jong Goo, standing commissioner at the Financial Services Commission (FSC), the government agency that oversees the country's finance industry. They got one anyway. International bankers and investors yanked money from emerging markets worldwide. South Korea's banks rely more on external financing than most others in the region. Amid a global shortage of credit, the banks struggled to find financing, often borrowing on overnight markets at high interest rates. Foreigners dumped South Korean shares and the stock market plunged. On Oct. 16, the won lost nearly 10% of its value, its biggest one-day drop since the 1997 crisis.

A Tall Order
The economic problems quickly became a political challenge for President Lee. A former CEO of Hyundai's construction company, Lee triumphed in the country's 2007 election on a platform of reform aimed at returning South Korea to rapid growth. Not only did the economic crisis make his campaign promises sound hollow, the President and his policy team came under heavy criticism for reacting too slowly to stem the turmoil. "The problem has become deeper than necessary," says Charles Chang, managing partner of Seoul-based boutique investment-banking firm Accolade. "It is the failure of the government." Chang believes policymakers did a poor job of building confidence among foreign investors to calm markets.

Beginning in mid-October, Lee sprang into action. The government earmarked $100 billion to guarantee new foreign debt for banks through mid-2009 in a bid to maintain the economy's access to foreign-currency borrowing. Shortly afterward, the Bank of Korea finalized a currency-swap agreement with the Federal Reserve to ensure a supply of dollars for the economy, which gave a big boost to confidence. In early November, the Finance Ministry announced an $11 billion stimulus package that included tax breaks and new infrastructure spending. The moves have recently brought some stability to stock and currency markets and eased foreign financing for South Korean banks. "I think we did the right things," says the FSC's Yi. That may be enough to lift South Korea's economy but not, perhaps, the spirits of its people.

— with reporting by Stephen Kim and Jennifer Veale / Seoul