From the KOSDAQ Mania to the LG Card Bailout: South Korea’s Post-1997 Twin Bubbles

In the aftermath of the December 1997 Asian Financial Crisis and the International Monetary Fund’s $58 billion emergency bailout, President Kim Dae-jung’s administration set out to dismantle South Korea’s decades-old economic model of state-directed bank lending to heavily leveraged family conglomerates (chaebols). To ignite new engines of domestic growth, Seoul aggressively promoted two alternative financial channels: a deregulated venture-startup equity market centered on the Korean Securities Dealers Automated Quotations (KOSDAQ) exchange, and an unbridled expansion of consumer credit cards. Instead of stable diversification, the twin policy experiments produced back-to-back speculative manias. First, the KOSDAQ composite index soared nearly 400 percent in 1999 before crashing by more than 80 percent in 2000; then, a government-subsidized credit-card boom—which placed 105 million cards in the hands of 24 million economically active citizens—imploded following the March 2003 SK Global accounting scandal, leaving 3.7 million Koreans officially delinquent (sin-yong-bul-lyang-ja) and forcing a ₩5.4 trillion ($4.5 billion) creditor bailout of the nation’s largest issuer, LG Card. ^[1]

Post-IMF Restructuring and the Venture Startup Drive (1998–1999)#

When the 1997–1998 crisis forced roughly half of South Korea’s thirty largest chaebols—including Daewoo Group—into bankruptcy or court-supervised workouts, commercial banks recoiled from corporate lending and scrambled to rebuild capital adequacy ratios under strict Financial Supervisory Commission (FSC) oversight. Confronting record unemployment and a sharp contraction in industrial investment, the Kim Dae-jung government enacted the Special Measures Law for Fostering Venture Businesses and poured public seed capital, tax exemptions, and loan guarantees into information-technology, broadband internet, and telecommunications startups. ^[2]

The primary capital-market vehicle for this digital transformation was the KOSDAQ, established in July 1996 by the Korea Securities Dealers Association as an electronic over-the-counter board modeled directly on the U.S. NASDAQ. In May 1999, regulators drastically relaxed KOSDAQ listing requirements, allowing newly formed technology ventures with zero operating profit to go public while offering retail investors tax breaks on venture-fund investments. At the same time, South Korea’s rapid rollout of asymmetric digital subscriber line (ADSL) broadband and PC bang internet parlors turned online day trading into a national obsession. Within months, more than half of all South Korean equity trades were executed online by retail investors, the highest retail electronic trading share anywhere in the world. ^[3]

The 1999–2000 KOSDAQ Dot-Com Mania and Crash#

Between early 1999 and March 2000, the KOSDAQ experienced one of the most violent speculative surges in global stock-market history. Measured on the benchmark 1,000-point base scale, the KOSDAQ Composite Index rocketed from roughly 751 at the start of 1999 to an all-time intraday peak of 2,834.4 on March 10, 2000 (283.44 on the earlier 100-base scale)—an astonishing gain of nearly 280 to 400 percent from its post-crisis lows. Flagship internet portals, telecom equipment makers, and biotechnology startups such as Serome Technology (developer of free internet phone service Dialpad), Daum Communications, and Haansoft saw their share prices multiply twenty- to fifty-fold in a matter of months. In February 2000, daily trading value on the junior KOSDAQ board briefly surpassed turnover on the main Korea Stock Exchange (KOSPI) board, even though KOSDAQ companies represented only a fraction of Korea’s industrial output. ^[4]

When the U.S. NASDAQ peaked in March 2000 and global technology valuations buckled, the KOSDAQ bubble burst with devastating speed. Compounded by a series of domestic venture-capital embezzlement and stock-manipulation scandals—most notoriously the MCI Korea and Jung Hyun-joon gate affairs in late 2000—retail confidence evaporated. By December 2000, the KOSDAQ Composite Index had plunged to 525.8 (52.58 on the old scale), wiping out more than 81 percent of its peak market value inside nine months and posting the worst annual performance of any stock index worldwide. Hundreds of billions of won in household savings vanished, shutting down the equity fundraising window for Korean startups and threatening to tip the domestic economy back into recession in 2001. ^[5]

Deregulating Plastic: The 1999–2002 Household Credit-Card Boom#

As the KOSDAQ mania collapsed and global technology exports slumped in 2000–2001, economic policymakers in the Ministry of Finance and Economy doubled down on a second engine to stimulate domestic private consumption and bring self-employed merchants into the formal value-added tax net: plastic consumer credit. Beginning in 1999, the government introduced generous income-tax deductions for workers whose annual credit-card spending exceeded 10 percent of their gross salary, alongside a televised national lottery for credit-card receipts that awarded monthly cash prizes of up to ₩100 million ($85,000). ^[6]

Crucially, in May 1999 financial regulators abolished the long-standing regulatory ceiling that had required credit-card companies to generate at least 40 percent of their business from actual merchant purchases rather than cash advances (hyeon-geum seo-bi-seu) and card loans. Freed from balance-sheet limits, non-bank mono-line card companies—led by LG Card, Samsung Card, Hyundai Card, and Kookmin Card—embarked on a reckless market-share war. Street vendors hired on commission set up folding tables outside university gates, subway stations, and shopping malls, handing out pre-approved credit cards accompanied by free gifts to college students, housewives, and unemployed applicants without verifying income or checking unified credit histories. ^[7]

The statistical explosion was extraordinary. Between 1999 and late 2002, the total number of credit cards in circulation in South Korea nearly tripled from 39 million to 104.8 million—an average of 4.6 cards for every economically active South Korean adult—while total annual card transaction volume surged nearly seven-fold from ₩91 trillion in 1999 to ₩623 trillion (roughly 114 percent of GDP) in 2002. Over 60 percent of that volume consisted not of retail purchases, but of short-term revolving ATM cash advances charging annualized interest rates of 20 to 29 percent. Millions of overextended borrowers stayed current only through “card-hopping” (dol-ryeo-mak-gi): drawing a cash advance on Card B at the end of the month to pay off the maturing balance on Card A, then using Card C to pay off Card B. ^[8]

The SK Global Shock and the ₩5.4 Trillion LG Card Collapse (2003–2004)#

By late 2002, household debt had climbed from 50 percent to over 70 percent of GDP, and the Financial Supervisory Service belatedly ordered card issuers to tighten cash-advance limits and raise bad-loan provisioning ratios. That regulatory tightening instantly broke the dol-ryeo-mak-gi revolving chain, causing delinquency rates to jump from under 6 percent in early 2002 to over 11 percent by early 2003. Because mono-line card companies were legally prohibited from taking retail bank deposits, they funded their entire loan books by issuing short-term commercial paper and corporate bonds purchased heavily by South Korean Investment Trust Companies (ITCs) and Money Market Funds (MMFs).

On March 11, 2003, prosecutors announced that SK Global—the trading affiliate of South Korea’s third-largest conglomerate, SK Group—had falsified its financial accounts by ₩1.56 trillion ($1.3 billion) to conceal concealed debt and overseas trading losses. Coming just days after North Korea test-fired a missile and global markets braced for the Iraq War, the SK Global accounting shock triggered a classic run on South Korean Investment Trust Companies. Terrified investors redeemed more than ₩25 trillion ($20 billion) from MMFs and bond funds inside three weeks. Forced to liquidate assets, ITCs dumped credit-card bonds and refused to roll over maturing commercial paper, freezing the secondary market for card-company debt. Only an emergency ₩5 trillion liquidity bridge arranged by the Bank of Korea and creditor banks in April 2003 averted immediate sector-wide insolvency.

The reprieve lasted only seven months. As borrowers unable to roll over cash advances defaulted en masse, sector-wide credit-card delinquencies (including restructured re-aged loans) soared past 30 percent, and the Korea Federation of Banks registered 3.72 million individuals—roughly 16 percent of South Korea’s entire economically active population—as official credit delinquents (sin-yong-bul-lyang-ja), barring them from bank accounts, formal employment, and credit. At the epicenter stood LG Card, the industry giant with 14 million cardholders and ₩27.7 trillion in managed assets. On November 19, 2003, facing run-off of its commercial paper and catastrophic write-downs, LG Card exhausted its cash reserves and abruptly suspended ATM cash-advance services across the country.

Because commercial banks and ITCs held over ₩20 trillion in LG Card bonds and loans, an disorderly bankruptcy threatened to topple South Korea’s banking system. In January 2004, the Ministry of Finance and Economy and the Financial Supervisory Commission strong-armed sixteen creditor institutions—spearheaded by state-owned Korea Development Bank (KDB)—into a massive ₩5.4 trillion ($4.5 billion) bailout and debt-for-equity swap that wiped out LG Group’s controlling stake, placed LG Card under KDB state receivership, and ultimately enabled its sale to Shinhan Financial Group in 2007. To heal the scarred household sector, the government created the Bad Bank program (Hanmaeum Finance) and expanded the Credit Counseling and Recovery Service in 2004, spending the remainder of the decade digesting the twin hangovers of the KOSDAQ and credit-card manias.

Theoretical & Balance-Sheet Transmission Mechanism#

In the Kindleberger–Minsky taxonomy of financial instability (Kindleberger, 1978; Minsky, 1986) and Irving Fisher’s (1933) debt-deflation framework, speculative asset booms become systemic crises when credit expansion shifts balance sheets from hedge finance (cash flows covering principal and interest) to speculative and Ponzi finance (relying on rising asset prices and short-term margin roll-overs).

Once monetary tightening or an exogenous shock halts price appreciation, forced margin liquidations trigger Fisherian debt-deflation: fire-sale asset discounts erode bank collateral values, contracting credit supply across the real economy.

Sources and Further Reading

1. Chang-Gyun Park, “ Consumer Credit Market in Korea after the Economic Crisis,” National Bureau of Economic Research East Asia Seminar on Economics, 2009. Peer-Reviewed / Academic Research
2. Guonan Ma, “ Credit Card Lending Distress in Korea in 2003,” Bank for International Settlements (BIS) Papers No. 46, 2009. Historical & Financial Reference
3. Myung-Jig Kim, “ Stress EAD: Experience of 2003 Korea Credit Card Distress,” Journal of Economic Research, 2008. Peer-Reviewed / Academic Research
4. Byungseop Yoon, Kwon-Soo Kim, and Heeoh Kim, “ The Impact of Venture Capitalist’s Ownership on the Underpricing of KOSDAQ IPOs,” Korea International Accounting Review, 2011. Peer-Reviewed / Academic Research
5. Yeong-Wha Sawng and Bae Khee Su, “ New Technology Venture and the Largest Shareholder in KOSDAQ Capital Market,” Korea International Accounting Review, 2018. Peer-Reviewed / Academic Research
6. Ito Peng, “ Postindustrial Pressures, Political Regime Shifts, and Social Policy Reform in Japan and South Korea,” Journal of East Asian Studies, 2004. Peer-Reviewed / Academic Research
7. Irving Fisher — "The Debt-Deflation Theory of Great Depressions," Econometrica 1, no. 4 (FRASER Federal Reserve Archive, 1933): 337–357 Central Bank / Monetary Authority
8. Charles P. Kindleberger & Robert Z. Aliber — Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan) Peer-Reviewed / Academic Research

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