S. Korea Bonds Downgraded; Currency and Stocks Plunge

The South Korean stock market and currency both plunged in early trading today after prominent credit-rating services downgraded South Korean bonds to junk status.

The mood of financial crisis also deepened in Tokyo, as stock prices tumbled again.

The bond downgrades--by Moody’s Investors Service on Monday and by Standard & Poor’s Corp. today--sent the South Korean won plunging 9% on Monday and another 12% by midday today, to a record low of 1,995 won to the dollar.

The country’s main stock index was off 7.3% to 367.23 at midday today, nearing the 10-year low of 350.68 set Dec. 12.

The Moody’s downgrade labeled South Korea’s foreign-currency-denominated bonds junk status, which means they are considered below investment quality. S&P;’s downgrade was worse--four notches below investment grade.

S&P; said South Korea’s efforts to bail out its banks could force the government to default on its own debt.

Government officials quickly denied that any default is imminent. “We don’t have any problem repaying our foreign debt this year,” said Kim Woo Suk, director general of international finance at the Finance Ministry.

But a newspaper report today said President-elect Kim Dae Jung told a meeting of legislators that he was “flabbergasted” by a government report given to him outlining the crisis facing the South Korean economy.

“We don’t know whether we’ll default tomorrow or the day after tomorrow,” Kim is quoted as saying. “Our warehouse is empty. It’s a matter of surviving a day, not a month. I can’t believe how the government has been so negligent.”

It was not immediately clear to what degree Kim’s comments were political. They could be aimed at pinning blame for coming hard times on the incumbent administration and preparing the South Korean people for the belt-tightening required under a $60-billion International Monetary Fund bailout plan.

Saying the crisis was greater than he realized makes it easier for Kim to back off from campaign pledges, such as a vow to fight against layoffs.

In one piece of good news, the government announced today that it will receive $5 billion from the World Bank and the Asian Development Bank on Wednesday as part of the IMF package.

Nonetheless, the bond downgrades to junk status sent South Korean companies scrambling for dollars early today, triggering the renewed plunge in the won and in stock prices.

Moody’s cut the rating on Korean government debt to Ba1, a “speculative” grade informally referred to as a junk rating. It also downgraded 20 banks and nine of the country’s top companies--including Korea Electric Power Corp., Pohang Iron & Steel Co. and Samsung Electronics Co.--to junk ratings.

The downgrades will make it harder for Korean companies to refinance debts, because many global institutional investors cannot invest in securities rated below investment grade. Some investors may now have to dump their Korean bonds into an already-depressed market. Foreign banks also may balk at rolling over dollar-denominated loans to strapped Korean borrowers.

South Korean firms are estimated to have about $10 billion to $15 billion of short-term foreign debt coming due between today and the end of the month.

Bond yields soared in South Korea today in the wake of the credit downgrades.

Moody’s on Monday also downgraded Thai and Indonesian bonds to junk status.

Meanwhile, in Tokyo, stocks fell Monday to their lowest level since mid-1995 amid continuing gloom about the economy.

The Tokyo market’s Nikkei-225 share index fell 515.49 points, or 3.4%, to end Monday at 14,799.40--its first close below the psychologically important 15,000 level since July 1995. That left the index down 11% in just three sessions.

The yen also weakened, with the dollar trading at 130.42 yen Monday, up from 128.93 on Friday.

The Tokyo Stock Market is closed today for a holiday.

Monday’s market decline worsened fears that steps announced last week to stabilize Japan’s financial system and boost economic growth may be far too weak. As banks try to clean bad debts out of their portfolios and prepare to meet new capital-adequacy requirements due to kick in March 31, the country faces a worsening credit crunch.

“If this continues, Japan could enter a vicious cycle like the one South Korea is in now,” said Eiji Yamamoto, an economics professor at Konan University in Tokyo. “If Japan gets dragged into the crisis, it can spread worldwide, including to the United States.”

The latest slide in Japanese stocks came despite the release last week of a plan to issue $77 billion of bonds to protect depositors and stabilize Japan’s banking system and a surprise decision by Prime Minister Ryutaro Hashimoto to implement a $15.3-billion income tax cut in an attempt to spark the economy.

“The size [of last week’s economic stimulus package] is not big enough to reconstruct Japan’s economy, and the market knows it,” said Chang Yi, an analyst at Kokusai Securities Co. in Tokyo.

A key factor weighing down the Japanese economy is the massive sum of bad loans burdening the banking system.

The Japanese Finance Ministry announced Monday that as of Sept. 30, bad loans at Japanese financial institutions totaled $216.2 billion, up 0.6% in yen terms since March 31.

But many private analysts estimate the real sum may be twice that much.

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Chi Jung Nam of The Times’ Seoul bureau and Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.