IMF Crisis

IMF Crisis (아이엠에프 위기/危機) means the financial crisis experienced by Korean people in the late 1990s, which was caused by the severe foreign exchange shortage on the brink of default of South Korea in December 1997, and bailed out by the IMF Standby Credit Facility and other international financial supports. Surely it was not the crisis caused by the International Monetary Fund (IMF), but rescued by IMF.

Until August 2001 when the government declared the prepayment of IMF credit up to U$19.5 billion, the Korea's economy and society were dominated by the IMF austerity program under the Memorandum of Understanding between the Korean government and IMF dated of December 3, 1997.

Key words
IMF Crisis, financial crisis, foreign exchange shortage, IMF austerity program, illiquidity

Background of the Crisis
Contrary to the general understanding, the 1997 crisis was caused not by a single external factor but by unhealthy and inefficient operations of nation's economy:
 * Failure to manage an appropriate level of foreign exchange holdings by preserving the OECD standard of living, i.e., over U$10 thousand per capita income;
 * Unprepared policy shift from the regulated foreign currency reserve to free market competition;
 * Overdependence to short-term borrowings abroad;
 * Illiquidity suffered by local finance companies as a result of asset-liability mismatch;
 * Concerted attacks against ill-managed Asian countries staged by speculative hedge fund operators.

Developments of the Crisis
See the chronicled information at a glance, though in Korean.

During the course of the Crisis, a number of businesses went bankrupt and multitudes of laborers and employees lost job. On the other hand, Neo Liberalism imported by foreign rescuers was rapidly spreading and prevailed in the Korean society. In the presidential election at the end of 1997, the power shifted from the New Hankuk Party (presently Grand National Party) to the opposition party led by Kim Dae Jung.

Aftermath in legal terms
Korean people had to survive the unprecedented crisis under the leadership of newly elected President Kim Dae Jung. They surprised foreigners in a nationwide campaign to collect gold preserved at home. In order to satisfy the austerity program imposed by IMF and specific terms on the list of the IMF MOU, existing laws and regulations, and even commercial practices had to be modified in line with the so-called "global standards" suggested by the IMF staff stationed to Korea.

Take an example of the Commercial Act. A new corporate governance as adopted in the United States was adopted to govern the Korean business community. Also the insolvency laws were demanded by the IMF Mission stationed to Seoul to be immediately revised. The legislation of the "Consolidated Insolvency Act" was sponsored by the World Bank and finally crystallized into the Act on Debtor's Rehabilitation and Bankruptcy in 2006 incorporating the existing Corporate Reorganization Act, Composition Act and Bankruptcy Act into one.

IMF Crisis-related cases
In the aftermath of the IMF Crisis, a number of financial institutions were restructured. Take an example of insolvent merchant banks. The Supreme Court held:
 * Article 24 of the Credit Management Fund Act provides that Credit Management Fund is responsible for matters such as normalization of management of mutual funds. Although merchant banks are not explicitly mentioned in this context, healthy development not only of mutual funds but of merchant banks constitutes the objective of the old Credit Management Fund Act which purports to maintain the good order of the credit market and to promote the national economy.
 * Moreover, the articles of incorporation of Credit Management Fund lists "acquisition and management of merchants banks with unsound management and financial position" as one of its operations. The decision of the Minister of Finance and Economy to appoint the chairman of the Credit Management Fund as the administrator for H Merchant Bank and several other ailing merchant banks also appears to have been motivated by considering the purpose and the scope of operation of Credit Management Fund. It is therefore concluded that Credit Management Fund's administration of operations and management of the fund of merchant banks which had been ordered to suspend their operations was part of the normal operations of the Credit Management Fund, and that in this case, "the Credit Management Fund was also in the position of the employer of the chairman of the board of directors" and of his or her agent who was the administrator of ailing merchant banks.