The currency crisis sweeping the Far Fast has reached a new, more dangerous level by cutting the feet out from under the South Korean economy, the world's 11th largest.
The possible impact on the United States and Japan has both countries trying to help South Korea avoid an international bail-out that would dwarf the 1995 Mexico rescue and likely hit American markets directly.
Yesterday, the US sent two top Treasury officials to Seoul for "consultations." Their message is that the International Monetary Fund (IMF) stands ready to intervene with a bailout package, a step most Western analysts say has now become unavoidable.
But the IMF must be invited in by the South Korean government, and as yet Seoul has shown no hints that it's preparing to issue such an invitation. Instead the government, fearing the reforms that the IMF might impose, has come up with its own emergency recovery plan - hoping to convince the markets and the international community that Korea can control its destiny.
The past few days have been a flurry of frenzied activity. On Wednesday, South Korea's finance minister was fired and his replacement, Lim Chang Yeul, introduced a set of reforms designed to restore international confidence in South Korea's finance system.
But if the value of the South Korean currency, the won, is any indication, there's no confidence in sight. After one hour of trading yesterday, the won fell as far as it could - 10 percent - under newly expanded government limits.
If banks collapse in South Korea, the impact would resonate as far away as Europe and the US. First, the failure of Korea's banks could bring down banks in Japan which hold a lot of Korean debt - and US debt. And if the currencies of both countries are devalued significantly, their import market for American goods could wither, while cheap Korean and Japanese exports - seen as a good way to jump-start their economies - could ignite a trade war with America.
Minister Lim disagrees with the market's first assessment of his reforms. At a press conference yesterday he asked journalists to "wait a few more days" before judging investor confidence.
But investors may not have patience or faith. They say the plan falls short and are waiting for the IMF's stamp of approval.
For South Korea, submitting to the IMF's strict loan conditions would amount to a loss of "economic sovereignty." If Seoul gives in, economic experts from the IMF would likely supplant South Korea's powerful Ministry of Finance and Economy.
Submitting to the IMF would immediately stabilize financial markets. But it would also be an embarrassing admission "that [the government] failed to manage the economic crisis," says Bark Taeho, an economist at Seoul National University. "[Bureaucrats] were praised for government-led economic growth" in the past and to abdicate is a huge loss of face, says Mr. Bark.
But Minster Lim says Korea's current reform package is "exactly the same" as what the IMF might propose. As a director at the IMF for three years "I know what the IMF can offer," he says. South Korea has been closely consulting with the IMF, which has publicly stated that the economy has been sound in the past month, Lim says.
"We're already doing all the reforms they recommended." It's "a difficult pill to swallow, but it may be a blessing in disguise," Lim says.
Foreign investors' fears are unwarranted, he says, pointing to "strong fundamentals" in South Korea's economy: no budget deficit, 6 percent projected growth, low inflation, and a dropping current accounts deficit. Investors lost confidence only after Southeast Asian currencies began deflating this summer, officials say.
But trouble has been brewing for decades. The government developed the nation by channeling scarce capital to key industries. In the process, banks never learned how to assess risk and favored companies knew that no matter how reckless an investment was they were "too big to fail."
Today's banks are burdened with billions of dollars in bad loans. Major corporate bankruptcies this year brought down Korea's international credit rating and then devaluation of currencies in Southeast Asia spooked investors to get out of Korea.
Observers say that government bureaucrats are aware of what they need to do. But political will - especially one month before the presidential election - is missing. "The problem is not the shortage of ideas but the will and skill of those strategists," says Kim Jong Seok, an economist at Hongik University in Seoul.