By Sandra Sugawara
Washington Post Foreign Service
Saturday, November 8, 1997; Page D01

TOKYO, Nov. 7—East Asia's wandering financial crisis struck hard in South Korea today, knocking 7 percent off the value of the country's stock market, the biggest one-day drop ever recorded there. Markets in Japan and Hong Kong suffered as well, new evidence that the region-wide jitters that have been reverberating in American markets have not played out.

The bad news from Asia again helped create a selling mood on Wall Street, where the Dow Jones industrial average shed 101.92 points. Also driving the drop was news that U.S. unemployment had hit a 24-year low, which investors feared will bring on inflation that will make stocks less attractive.

[The decline in South Korea continued for a second day Saturday as the stock market fell another 3.9 percent in value, the Associated Press reported.]

South Korea officials denied rumors that the country, Asia's second-largest economy, needed a bailout by the International Monetary Fund. IMF Managing Director Michel Camdessus agreed that it did not, saying South Korea's condition was not as alarming as those in Thailand and Indonesia when they sought IMF assistance, the Reuters news service reported.

After a two-decade race toward industrial affluence, South Korea finds itself suffering from what has become a standard Asian disease. Many big industrial conglomerates are weak, and some are in bankruptcy -- automaker Kia Motors among them. Banks are getting government aid. Exports are stalled, helping create a huge trade deficit.

Today's panic, which also drove down the value of South Korea's currency, the won, created further worries. Many analysts fear the country's foreign exchange reserves are dangerously low, which could create a debt service crisis.

The Bank of Korea, the central bank, says it has reserves of $30.5 billion. That's barely sufficient to meet IMF guidelines of having enough on hand to cover three months' import bills. The central bank has also vowed to guarantee that no South Korean bank goes bust, and it has declared that it would intervene in markets to prop up the value of its currency.

The question is: Does the central bank have enough hard currency to do all of that?

Firm financial data is sparse. As a result, "people have been speculating, especially in the last couple of days, that maybe in fact the central bank doesn't quite have those reserves, because it's been intervening in the foreign currency markets. Nobody knows," said Brian Hunsaker, Seoul-based banking analyst with Dresdner, Kleinwort Benson.

James Han, a banking analyst at Jardine Fleming Securities in Seoul, said that bad loans would wipe out the equity of nine of South Korea's 12 major banks if the problem loans were 100 percent unrecoverable. He estimated the cost of a South Korea banking bailout at about $15 billion.

Last week Moody's Investor Service downgraded the ratings of four Korean banks. "That was a big shock to Korean investors," said Kim Pyong Sok, senior banking analyst with Hannuri Investment Securities, because Moody's downgraded Korea First Bank, despite a government bailout in September.

The bankruptcy of a series of chaebol, as Korean conglomerates are called, earlier this year triggered the banking crisis. The propensity of Korea's industrial groups to borrow heavily has been well known for years. "What is new is a financial system with balance sheets so stretched with bad loans that [it is] unable to continue active funding support to corporations with structural problems," said Han. " . . . This is the vicious cycle Korea is in right now."

"The top eight banks account for 70 percent of total bank lending," noted Kim. "If one of the banks were to go bust, it might cause a very panicky situation in the Korean market." For that reason, he said, the government won't allow them to go under.

Said Hunsaker: "There are severe problems in the banking sector, but there is not any political leadership or will to make any changes, so the government attitude has been to try to solve little problems as they arise, and just keep the system going."

While the economic turmoil in Asia started in the emerging markets of Southeast Asia this summer, anxieties have shifted to the so-called economic powerhouses. Today the Tokyo Stock Exchange's key Nikkei index closed at 15,836.36, its lowest level since July 1995.

In a report released today, Kenneth S. Courtis, Tokyo-based economist with Deutsche Morgan Grenfell, warned that the "quickening slide" of Japan's markets and economy "into zones of danger" could disrupt the world far more than financial turmoil elsewhere in East Asia. A crisis in Japan "could have an impact on global markets that dwarfs the financial implosion in Southeast Asia, Latin America and Europe."

Courtis said Japan's banks no longer meet their international capital requirements when the Nikkei falls below 16,000. "Should the market drop any lower -- and with no major change in policy that is likely -- Japanese banks will have to liquidate international assets. Much of these are in U.S. Treasury market. That could destabilize world bond markets," he said.

Both J.P. Morgan and Salomon Brothers have recently issued reports cutting their growth forecasts for Japan, saying the combined impact of a sales tax increase last spring and the general economic slowdown in Asia was hitting Japan far harder than anticipated.

Domestic demand is down. Exports to Asia, which account for almost 45 percent of Japan's exports, are down too. And bankruptcies are surging, creating more strains on an already unhealthy banking system.

"Production cuts are forcing reductions in wage, overtime hours and employment, and capital spending plans are likely to be curtailed," said the J.P. Morgan report. "Japan's economic outlook has deteriorated."

Western economists also seem surprised that the Japanese government has continued to pursue a tight fiscal policy of cutting spending and so far has resisted calls for a major corporate tax cut or other fiscal stimulus.

With dire predictions increasing, disputes within the government over the economy are becoming more public. International Trade and Industry Minister Mitsuo Horiuchi today told reporters that his ministry disagrees with the Finance Ministry's handling of the fiscal policy and wants to slash corporate taxes.

The stock market plunge in Tokyo today was triggered by a newspaper story that the Bank of Yokohama, a mid-sized regional bank, planned to sell its stock holdings in two to three years. Japanese banks hold substantial amounts of the stock of major clients and affiliated companies to cement relationships. Such a rapid sell-off of stocks industry-wide could cause prices to plummet. The bank strongly denied the report.