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Bad Credit Equilibria with the Abnormally Utilized Commerical

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  • Sungsup Ra

    (Korea University, Asian Development Bank)

Abstract

The Paper shows why and how the excessive use of commercial paper by financial institutions and corporations contributed to the vulnerability of the Korean economy to external shocks. We review the unfolding process of the Korean currency crisis,focusing on the role of the commercial paper. We examine how the excessive utilization of commercial paper led to bad credit equilibria in both financial and corporate sectors. We investigate the underlying institutional and market factors leading to the abnormal utilization of commercial paper before the Korean currency crisis erupted in November 1997. The factors identified are: interest rate differentials between the commercial and merchant banking sectors; relatively lax regulation in the commercial paper market; corporations' preference of debt financing over equity financing due to the concerns of ownership, tax subsidies and sluggish equity market; and equity market; and lack of good credit rating agencies.

Suggested Citation

  • Sungsup Ra, 2005. "Bad Credit Equilibria with the Abnormally Utilized Commerical," Finance 0503012, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0503012
    Note: Type of Document - pdf; pages: 29
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    References listed on IDEAS

    as
    1. Mr. Eduardo Borensztein & Jong-Wha Lee, 1999. "Credit Allocation and Financial Crisis in Korea," IMF Working Papers 1999/020, International Monetary Fund.
    2. Lance Taylor, 2001. "Capital Market Crises: Liberalization, Fixed Exchange Rates and Market-Driven Destabilization," Palgrave Macmillan Books, in: Ha-Joon Chang & Gabriel Palma & D. Hugh Whittaker (ed.), Financial Liberalization and the Asian Crisis, chapter 3, pages 21-39, Palgrave Macmillan.
    3. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    4. Joseph Bisignano, 1999. "Precarious credit equilibria: reflections on the Asian financial crisis," BIS Working Papers 64, Bank for International Settlements.
    5. Chang, Ha-Joon & Park, Hong-Jae & Yoo, Chul Gyue, 1998. "Interpreting the Korean Crisis: Financial Liberalisation, Industrial Policy and Corporate Governance," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 22(6), pages 735-746, November.
    6. George Soros, 1999. "The International Financial Crisis," Challenge, Taylor & Francis Journals, vol. 42(2), pages 58-76, March.
    7. Masahiro Kawai, 1998. "The East Asian Currency Crisis: Causes And Lessons," Contemporary Economic Policy, Western Economic Association International, vol. 16(2), pages 157-172, April.
    8. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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