Market turmoil adds hurdle to KDB-Lehman deal

By Michael Flaherty and Park Jung-youn - Analysis

HONG KONG/SEOUL (Reuters) - A wave of financial market turmoil that crashed into South Korea this week has made any deal between Korea Development Bank (KDB) and Lehman Brothers (LEH.N: Quote, Profile, Research) all the more difficult to pull off.

Waning confidence in the country's worsening balance of payments has triggered concern about a potential flight of capital from Asia's fourth-largest economy.

The won currency sank as much as 6 percent this week before rising sharply on Friday on suspected intervention; the stock market .KS11 has dropped 12 percent in five weeks and a Merrill Lynch research report said the central bank may raise interest rates by 0.75 percent over the next three months.

All this comes as state-run KDB pores over a deal with Lehman, a 158-year-old New York brokerage that's seen its shares plunge 75 percent this year, hit by exposure to subprime mortgage securities.

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

"If you look at the Korea specific context 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."

Wall Street has proved it can get deals done in good times, and bad. And, given that KDB's CEO is Lehman's former Korea head, a deal between the two cannot be ruled out.

But the economic backdrop, and other negative factors lurking, make a link-up look increasingly difficult.