Seoul Accepts $55 Billion Bailout TermsBy Paul Blustein and Sandra Sugawara
Washington Post Staff Writers
Thursday, December 4, 1997; Page A01
South Korea yesterday agreed to the terms of a record $55 billion international bailout, subjecting its once-thriving economy to the tough dictates of the International Monetary Fund.
The rescue package, which includes a $5 billion contribution from the United States, is bigger than the $50 billion of loans and standby credits that was marshaled for Mexico in early 1995. Yesterday's announcement prompted predictions of increased bankruptcies, layoffs and other economic turmoil in South Korea as the authorities act on the IMF's demands to close banks and dismantle many government controls over the nation's market and financial system.
Finance Minister Lim Chang Yuel warned the nation of wrenching adjustments to come, but said he had little choice but to submit. South Korea's currency and stock markets have been in free fall in recent days, raising the danger that the nation would run out of the U.S. dollars and other foreign currencies it needs to pay its obligations and keep its economy functioning.
"These pains and burdens are the cost our economy has inevitably to pay to revive and to recover our lowered credibility in the world financial society," Lim said.
In Washington, U.S. officials expressed satisfaction that the IMF had extracted major concessions from the Koreans that would force significant changes in government practices responsible for causing the crisis, such as state-directed bank loans to favored industries and companies.
But at a briefing for reporters, a senior Treasury official declined to predict that the bailout would necessarily end the series of financial market crises that started in Thailand last summer and later humbled several other Asian "tiger" economies.
"I will say that the more the Korean authorities succeed in carrying out their policy commitments, the sooner the crisis will end and the sooner growth will resume," said the official, who spoke on the condition of not being named.
He added a veiled hint that without the rescue of South Korea, the world's 11th-largest economy, the crisis might have been on the verge of spreading much farther afield. "It was our judgment over the last two weeks that it was important the Korean authorities move quickly," he said, "in light of what we saw as a deteriorating situation that we thought had important ramifications beyond Korea."
The Asian turmoil has already affected Russia, which is reportedly scrambling for cash this week, seeking an emergency bank loan and additional IMF financing so that it can meet ambitious promises to pay public servants by the year's end. Malaysia has also suffered steep drops in its currency and stock markets recently, raising fears that it may be next to run dangerously low on reserves.
The $55 billion package for South Korea is aimed primarily at restoring investor confidence and convincing foreign financial institutions -- Japanese banks, for example -- that Korean borrowers will be able to pay tens of billions of dollars in short-term debts that are soon coming due.
The package includes loan pledges of $21 billion from the IMF, $10 billion from the World Bank and $4 billion from the Asian Development Bank. In case those funds prove insufficient to restore investor confidence, several countries pledged to provide backup loans. Japan's promise of $10 billion and the U.S. pledge of $5 billion are the biggest, and several European nations also chipped in, including Britain, Germany, Italy and France. A similar arrangement was used in a rescue of Indonesia last month.
Treasury Secretary Robert E. Rubin defended the U.S. contribution of $5 billion to the backup loan pool. "We have a vital national economic and security interest in helping Korea to restore market stability as soon as possible," he said in a statement. "In this new global economy, American stability and prosperity is closely linked with the stability of the international finance system and the strength of our trading partners."
Rubin, in Santiago, Chile, where he is meeting with Western Hemisphere finance ministers, was quoted by Bloomberg News as asserting that the U.S. money would probably never be tapped because Seoul shouldn't be expected to need it. "The up-front money [from the IMF, World Bank and Asian Development Bank] was designed to be more than sufficient," he said. "The backstop money is there if for some reason there is a need for additional resources."
The U.S. money, should it be disbursed, would come from a special fund administered by the Treasury that does not require congressional approval. But Treasury officials remember congressional opposition to the $12 billion that the United States lent to Mexico, and the senior department official who briefed reporters said Treasury has been consulting with Capitol Hill throughout the crisis.
"Generally, the reaction has been constructive in recognizing the unfortunate necessity of our participation," he said.
Yesterday's announcement capped several days of hard-nosed bargaining between Korean and IMF negotiators in Seoul, during which Lim repeatedly said that a deal had been struck, only to backtrack when IMF officials insisted that his commitments were inadequate.
IMF Managing Director Michel Camdessus extracted the final concessions from the Koreans after landing in Seoul early yesterday morning. He apparently refused to participate in a morning signing ceremony and afternoon press conference that the Koreans had announced until more details could be ironed out.
The IMF's objectives were to break as much as possible a cozy network of relationships between the government, banks and giant industrial conglomerates that had helped make South Korea a potent competitor on world export markets but eventually created serious problems for its banking system.
The nation's industrial planners used the banks to fund the growth of giant corporations in sectors such as autos, computer chips and steel, with the main aim being the creation of high-skill jobs rather than profits. But the system, which worked beautifully when South Korea's economy was growing at 8 percent, began to come apart over the past year as half a dozen debt-laden conglomerates were forced into bankruptcy.
The IMF conditions are hardly likely to eliminate the power of the Korean bureaucracy. But, according to the senior Treasury official, "the program will bring about substantial changes in the Korean financial sector which in turn have the potential to open up the Korean economy and move it toward one that is much more dependent on the operation of market forces, and less dependent on industrial policies."
Seoul was forced to "make it possible for foreign banks to buy Korean banks and operate in Korea," the official said. That could weaken the state planners' power, as could other concessions by the Koreans to allow industrial companies to raise money directly from foreign financial institutions.
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