US default drama is last thing South Korea needs

At a White House dinner last month, Yoon Suk Yeol turned heads singing Don McLean’s “American Pie.” It was a uniquely lighthearted moment for two world powers joining forces in an increasingly chaotic economic moment. 

Yet what a difference a few weeks make as the U.S. plays with economic fire. 

It’s hard to pinpoint the exact day “the music died,” in the McLeanian sense, since Yoon returned to Seoul. But threats of a US default have since filled the financial airwaves. And it’s the last thing South Korea’s economy needs right now. 

To be sure, this isn’t the doing of Yoon’s state-dinner host, U.S. President Joe Biden. The specter of Washington’s first-ever default is compliments of Republicans in the House of Representatives. Lacking any fresh ideas to tame US spending, Republicans are again playing games with the debt limit.

“Again,” because the last time Republicans tried this financial Russian roulette in 2011, Standard & Poor’s stripped the US of its AAA credit rating. 

Biden, of course, insists his administration will avoid a 2011 redux — and a default. But there’s one clear winner if the U.S. starts missing bond payments as soon as next month: China. 

Sure, Beijing won’t like the losses it would suffer on the $865 million worth of U.S. Treasury securities it owns. And the fallout for world trade would make China’s 5% growth target even less attainable.

But Japan would lose more on its $1.1 trillion of U.S. debt. Chinese leader Xi Jinping’s designs on the yuan replacing the dollar as reserve currency would get a huge boost. Or perhaps a “BRICS” currency, as Brazil, Russia, India, China, South Africa and other anti-dollar-hegemony factions join forces. 

Korea’s economy, by sharp contrast, would be in harm’s way as much as any. Perhaps more, as fears of a U.S. default send capital into bigger and more liquid currencies like the yen. 

There’s a reason currency chaos can hit Korea hard, and not just because of its reliance on exports. Its sizable, open markets can be a quick place to turn investments into cash to meet margin calls or fund withdrawal orders.

All the more reason for Yoon to make sure Biden understands the gloomy mood music playing around Asia. That goes, too, for Japanese Prime Minister Fumio Kishida, another leader pivoting toward the U.S. at the risk of enraging China. 

Hopefully, Yoon is giving Biden an earful on how East Asia’s second and third biggest economies don’t want to be hit by the financial equivalent of a runaway train. 

Yoon might even cash in a chip or two. He could say something like: “Look, President Biden, we in Seoul have been solid allies in helping you make life harder on China, and at great risk. Promise me you won’t let a default happen.”

In Korea’s case, the world’s two leading memory chip manufacturers — Samsung Electronics Co. and SK Hynix Inc. — are facing geopolitical headwinds thanks in part to U.S-China tit-for-tat trade maneuvers.

Remember, too, how Hyundai Motor Co. last year pledged to invest $10 billion in the U.S. by 2025. Yoon’s team should be warning Biden that any hope of other massive Korea Inc. investments won’t happen if the U.S. defaults. 

This wouldn’t be a threat, exactly, but a statement of fact. It’s bad enough that U.S. banks have been failing this year. The collapse of Silicon Valley Bank and Signature Bank injected a whiff of 2008-like menace into markets.

The more recent near-death experience at First Republic Bank — before it was saved by JPMorgan Chase — reminded Asia all’s not well in the largest economy. At least those episodes, though, could be blamed on too much Federal Reserve tightening. Or too little bank regulation. 

A default would be a self-induced disaster for U.S. Treasury debt, thanks to House Speaker Kevin McCarthy’s party trying to score political points at the global economy’s expense. The shockwaves would hit any trading nation with high exposure to the dollar’s zigs and zags. Korea, this means you. 

The surge in bond yields should the U.S. even come close to default would slam Korean exporters. It might make MSCI less inclined to add new members to its developed market indexes -- Korea included -- just now. 

Debt market turbulence would put the Bank of Korea in a tough spot. Suddenly, one of the highest household debt ratios in the Organization for Economic Cooperation and Development could imperil Korean stability. 

Such angst seems a lifetime away from Yoon’s lighthearted evening at the White House -- from “American Pie” to the specter of the U.S. eating humble pie. It’s the last thing Korea needs in 2023. 

But the risk Washington is about to emanate with sour economic notes is one Seoul needs to start taking seriously.

by William Pesek


William Pesek is an award-winning Tokyo-based journalist and author of Japanization: What the World Can Learn from Japan's Lost Decades. Previously, he was a columnist for Bloomberg and Barron’s.