South Korea was perceived to have a strong economy so the high level of debt was not thought to be a serious problem. In the earlier international debt crisis of the 1980's the comment in comparing South Korea's debt condition with that of the major Latin American debtors of Mexico, Brazil and Argentina was that South Korea had invested the borrowed funds wisely so there were assets associated with the debts whereas in Latin America a good deal of the borrowed funds were wasted so there were no assets to balance much of the debt. But while South Korea invested wisely it also engaged in riskier and riskier strategies. In the early 1990's South Korea began to increase its short term debt. In 1992 short term debt constituted about one third of its total borrowing, but by 1996 short term debt had risen to two thirds of its total of $158 billion of foreign debt. South Korean firms were operating with a high degrees of leverage. The typical leverage ratio for South Korea firms was in the neighborhood of six to one and some South Korean firms had leverage ratios of 600 to one.

In times of prosperity and rates of return higher than the interest rate on debt high levelage inflates the rate of return on equity but when the overall rate of return on falls below the interest rate the equity holders may face negative rates of return. These high risk strategies are in keeping with the reputation of Koreans as volatile and prone to take risks, the Italians of Asia.

There has been tendency to deny the obvious. Clifford and Engardio cite the case of Korea First Bank reprimanding a Hong Kong financial analyst for issuing a warning that Korea First Bank was dangerously exposed due to large loans to the Hanbo Group. The next day the Hanbo Group went bankrupt and defaulted on its $800 million of loans from Korea First Bank. Subsequently Korea First Bank collapsed.

A substantial share of South Korean banks were in financial straits in 1997 because of bad loans. And it was not only the banks. Eight of the top 30 chaebol were insolvent in 1997. Hanbo was not by any means the only chaebol to go bankrupt during the financial crisis of 1997-98. Other firms were Jinro, a brewery, and Kia, an auto maker. Kia was resurrected by its acquisition by Hyundai and continues to operate.

"The end of the miracle," The Economist November 29, 1997

South Korea after three decades of growth at an average rate of 8.6 percent per year on November 21st, 1997 asked the IMF for $20 billlion to handle its short-term financial needs. It is estimated that the total required to clear up South Korea's financial problems will be from $60 to $100 billion.