By mid-December, bankers, central bankers, governments, the IMF, were increasingly worried that Korea was on the point of financial collapse. Its banks were weighed down by excessive short-term foreign-currency debt; its hard-currency reserves were on the point of exhaustion. Worryingly, the $57 billion multilateral government and IMF aid package hammered out in November had failed to stop the haemorrhaging of liquidity, confidence and credit.
Senior figures in the US treasury privately told bankers that they had fully expected the IMF agreement and the promise of $57 billion in aid to shore up confidence among foreign creditors to Korea sufficiently for the country immediately to return to the international bond markets to raise new money. But the surprise failure in December of a proposed $2 billion three-year bond deal for the Korean Development Bank, led by JP Morgan, left this strategy in tatters and precipitated a crisis. 'The KDB deal was a real watershed,' recalls one US banker.
Potential investors in that deal had been horrified when Korean officials could not provide a credible breakdown of the precise maturity profile of debts of Korean banks falling due within one year. Dealers in Korean commercial paper saw $600 million worth of Korean paper mature in a single week in December and investors refuse to buy any more.