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[aquaponics08]

Did Minerva Actually Do the Government a Favor
23 February 2009

http://www.koreainfocus.com/2009/02/did-minerva-actually-do-government.html

Though it may not have been his intention, Minerva may have actually done the government a favor with his post late last year predicting a "Yellow Rabbit" crisis during late February to March of this year.

It was this prediction that put him in the legal cross-hairs of Lee Myungbak's government. His since fired finance minister, Kang Mangsoo, publicly responded and even offered to meet one on one. When a man named Park was arrested, jailed without bond and indicted for being Minerva, the original charge was related to Minerva's claim that the government had told currency traders to stop selling won and buying dollars on December 27th. Nevertheless, it was the March crisis prediction that really set the government on edge.

The problem is that the Korean banks and other financial institutions borrowed a lot of money denominated in foreign currencies, particularly the Japanese yen and the American dollar. A lot of that money is coming due over the next month or so and Minerva's fear was that Japan banks, most of which close their books at the end of March, would not want to continue financing Korean financial institutions. This situation would be exacerbated by Japanese hedge funds (or Yellow Rabbits) betting aggressively against the won and foreign indirect investment money (money invested in the bond and stock markets) flowing out of Korea.

The Korean government's responses to Minerva's post were two-fold. First, they set out to find and arrest him, a strategy which made them look foolish at best and repressively anti-democratic at worst. Their second strategy, however, was to proactively take steps to prevent a liquidity crisis. Lee's government negotiated currency swap agreements and this week announced an open ended expansion designed to prevent the very crisis Minerva predicted. In a warning to hedge fund traders who may try to take advantage of a currency shortage, the government threatened to intervene in currency markets to support the won against perceived manipulation. Region wide expansion of currency swap arrangements denominated in dollars from 80B to 120B is being pursued at this week's ASEAN+3 Finance Minister's Conference.

Personally, I don't see a major collapse this March, primarily because it's become so widely known and the Korean government has taken the necessary steps. Also, the Japanese are hurting as bad as anybody with the overly high yen killing Japan's economy. Real exports fell at an annualized rate of 45% in the fourth quarter of 2008, the last quarter for which we have data. Industrial production has fallen 50% on an annualized rate since September. Thus, the Japanese banks and government have just as strong an incentive to help Korea through whatever liquidity issues emerge as Korea does, because they would be badly hurt by any further unwinding of the yen carry-trade and escalation of the yen.

And if Korea's financial institutions get through March unscathed, maybe they should thank Minerva for his warning.

[angel of bob]

This economic analysis is really helpful, thanks.

Oddly enough I never thought of the financial veracity of Minerva's statements, but was more fascinated/shocked/confounded by the current political administrations willingness to cultivate more extremely bad PR by essentially arresting a blogger for making comments critical of the administration.

[mises]