A wave of financial market turmoil that crashed into South Korea last week has made any deal between Korea Development Bank and Lehman Brothers more difficult to pull off.

Waning confidence in the worsening balance of payments has triggered concern about a potential flight of capital from South Korea, the fourth-largest economy in Asia.

The won sank as much as 6 percent for most of the week before rising sharply on Friday; the stock market has dropped 12 percent in five weeks, and a Merrill Lynch research report indicates the central bank may raise interest rates by 0.75 percent over the next three months.

All this comes as KDB, a state-run bank, considers a deal with Lehman, a 158-year-old New York brokerage that has seen its shares plunge 75 percent this year as a result of exposure to subprime mortgage securities.

With Lehman's market capitalization at $11.7 billion, any big investment by KDB is likely to cost several billion dollars and to involve loans as well as participation by other banks. The timing does not look good.

"In the current economic environment, there are uncertainties over Korea's external position," said Takahira Ogawa, director of sovereign ratings at Standard & Poor's. "If KDB needs funding, the cost of the funding would be very significant."

Since KDB's chief executive is Lehman's former head in Korea, a deal between the two cannot be ruled out. But the economic backdrop, and other negative factors, make a deal look increasingly difficult.

"KDB will have to think real hard about whether Lehman is worth taking the risk," said Choi Doo Nam, an analyst at Prudential Investment & Securities.

"If KDB is talking about 6 trillion won for a 25 percent stake," he said, referring to media reports about an investment worth about $5.3 billion, "I'm not so sure it's worth taking such tremendous market and financial risks."

Government intervention is also a factor. Although KDB is in the process of privatizing, state officials can still weigh in.

Like China, South Korea has seen its investments in Wall Street drop in value. Shares of Merrill Lynch have more than halved in value since Korea Investment Corp., a sovereign fund, agreed in January to buy $2 billion worth of new preferred shares in the bank, which has had its share of problems related to subprime mortgages.

The chances of a deal have not been helped by denials by several Korean banks of reports that they might join KDB in its investment.

That said, Lehman looks cheap.

"Will KDB have another opportunity to buy a significant stake in such a reputable global investment bank like Lehman?" Choi of Prudential asked.

And, some argue, the overall fundamentals of the South Korean economy are sound at the moment.

A veteran banker based in Hong Kong, who did not want to be named because of the sensitivity of the issue, said that KDB had eyed buying an investment bank with a global network. While Lehman's roots are in brokerage, it has a large investment banking franchise that has expanded rapidly in Asia in recent years.

Over all, however, the timing for a possible KDB-Lehman deal is tough. Just last week, Doosan Infracore, the South Korean maker of industrial machinery, said it and an affiliate would pump a combined $1 billion into companies set up for the purchase of the Ingersoll- Rand units it had agreed to buy in the United States last year. That $1 billion may have spooked Korean bankers and buyers looking abroad.

Originally published by Reuters.

(c) 2008 International Herald Tribune. Provided by ProQuest LLC. All rights Reserved.