'Unproductive' Credit and the South-Korean Crisis.
reportposted on 26.03.2009, 12:13 by Panicos O. Demetriades, Bassam A. Fattouh
We provide a novel empirical analysis of the South Korean economy that reveals large volumes of excess or 'unproductive' credit since the late 1970s, indicating that a sizeable proportion of total credit was used to refinance unprofitable projects. Our findings are consistent with the hypotheses of 'overlending' and 'overinvestment', which may reflect soft budget constraints and/or moral hazard. We argue that while these weaknesses were not on their own responsible for the financial crisis, their interaction with the risks emanating from capital account liberalisation created fertile ground for financial panic.