By Paul Blustein
Washington Post Staff Writer
Wednesday, May 13, 1998; Page C09

Asia's financial markets, which appeared to be recovering smartly earlier this year from their devastating collapse in late 1997, have weakened anew in recent days as bankruptcies, joblessness and political unrest have spread throughout the crisis-stricken region.

South Korea's main stock index -- one of the world's fastest-rising in the first three months of 1998 -- fell 2.7 percent yesterday to a level not seen since December, when the country nearly defaulted on its foreign debts. Hong Kong's main stock index declined 2.5 percent to a 15-week low, and the interest yield on 10-year Japanese government bonds dipped to a record low 1.29 percent, reflecting the nation's persistent economic sluggishness.

In Indonesia, which struck a new rescue agreement just last week with the International Monetary Fund, the rupiah fell 6 percent yesterday to about 9,300 per dollar, far below the 6,000-per-dollar target the IMF and Indonesian authorities have set.

The weakness continued in early trading today as Korea's main stock index fell another 0.6 percent, Hong Kong's fell another 2.2 percent and Indonesia's currency slid a further 6.3 percent.

Analysts and government officials broadly agreed that the renewed turmoil differs from last year's crisis in that some of the afflicted countries -- notably South Korea and Thailand -- have accumulated large reserves of foreign currencies, and are thus in little danger of being unable to meet their international obligations.

But a U.S. official acknowledged that the markets' latest downward turns have worried global finance ministers.

"You can safely say that the mood at the finance ministers' meeting [of the Group of Seven industrial countries] over the weekend was a bit more concerned than it had been previously," the official said.

The concern over Indonesia is much deeper than for other Asian countries, where bargain-hunting investors sent stocks soaring in January, February and March as a general consensus grew that the worst of Asia's troubles had passed.

A senior IMF official said yesterday he believed markets had become overenthusiastic about recovery prospects in Korea and Thailand a couple of months ago, and are now overreacting in a negative direction in response to evidence of the hardship the crisis is inflicting on companies and citizens.

In Korea, for example, the unemployment rate has more than doubled to 6.5 percent, sparking labor union protests, and in recent days, several large Korean industrial groups have disclosed that they are teetering on the edge of bankruptcy.

"I think both Korea and Thai fundamentals are all right, but we're still going to go through some hard times," he said, asserting that both countries remain on track in implementing market-oriented reforms of their economies. "There are going to be ups and downs, but on the whole, it's going to be up."

But he conceded that the outlook is much gloomier in Indonesia, where outbreaks of serious unrest over the past week are threatening to doom any chance that capital will flow back into the country.

"The unfortunate thing is that on the economic side, the Indonesians are finally putting [reforms] in place," he said. "Unfortunate, in the sense that it may be a bit late."

As much as the situations differ from country to country, the investor pessimism about all of them reflects a common recognition of the economic ramifications of last year's plunge in currency and stock values.

"What the markets are realizing is that the adjustment is going to be very hard, very harsh, and will take a long time," said Gregory Fager, head of the Asia department at the Institute of International Finance, an organization of financial institutions that invest in emerging markets.

In Korea, Fager said, it should hardly be surprising that stock values are severely depressed. The nation's companies badly need to free themselves from an excessive dependence on bank borrowing and must thus raise huge amounts of equity capital -- which decreases the value of existing shares, he noted.

Moreover, output among the nation's factories has been falling fast -- industrial production was down 10 percent in March, and auto production is off 50 percent from its highs, Fager said.

Such problems seemed far from the market's collective mind in early April, when the Korean government sold $4 billion in bonds to global investors in what was widely hailed as a sign of the country's emergence from crisis.

"We've had a first cycle of utter despair and fear, and then a cycle of elation and bond issuance, and now we're back to disappointment," said Mark Siegel, a managing director at Darby Overseas Investments, a Washington firm. "The markets are realizing that what Korea and the rest of Asia have to go through in order to get their financial houses in order is a long, drawn out and very uncomfortable recession."