By Clay Chandler
Washington Post Staff Writer
Thursday, December 11, 1997; Page A01

South Korea has made an urgent appeal for additional financial assistance from the United States and Japan and delivered it with an implicit threat: Let the Korean economy slide into default, and the rest of the world economy will suffer, too.

But on Wall Street and in Washington, the Koreans' dire prediction elicited mostly shrugs.

The steady drumbeat of bad economic news from Korea has some analysts warning of the dangers of a financial "domino effect," in which the collapse of the Korean economy would trigger a new round of money crises throughout Asia and the rest of the developing world. But many investors, government officials and security experts in the United States yesterday argued that it is just as likely that the Korea domino—if it falls—would topple all alone, without much impact beyond its borders.

A Korean default likely would prolong the suffering in the rest of Asia and could buffet emerging economies in other regions—Brazil, for instance, and possibly Russia, experts said. But many expressed doubtthat even a complete collapse of the Korean financial system would do significant damage to the U.S. economy or America's strategic interests in Asia.

In the event of a Korean default, "the impact for the United States economy would be relatively modest," said Morris Goldstein, a senior fellow at the Institute for International Finance. "There has to be a limit" to the amount of international assistance available to poorly run economies, he said, and "the Koreans already have been given more than their share."

Indeed, a few observers suggested yesterday that allowing an implosion of the Korean economy might do more good than harm.

Peter Kenen, a specialist in international monetary policy at Princeton University, argued that the U.S. Treasury and the International Monetary Fund should pull the plug on the existing international bailout to Korea to send a clear message to other emerging markets that they cannot expect to be rescued from their own mistakes.

"At this stage, frankly, I think it would be better to say we'll put up $50 billion for troubled countries that are the victims of Korean default and make an object lesson of the Koreans for their cavalier way of handling all this," Kenen said.

In fact, a few U.S. analysts said they had already written off the Korean economy. "The truth of the matter is that Korea Inc. is already bankrupt," declared Ed Yardeni, chief economist at Deutsche Morgan Grenfell Inc. in New York. "All that's left to do is file the papers. This is a zombie economy."

On Monday, the Korean government acknowledged that its short-term debts totaled $100 billion, nearly double the figure it announced last month. And its cash reserves had dwindled to just $6 billion before the IMF deal was signed.

The Koreans have other options besides default. One would be to persuade foreign creditors to restructure their loans, either by postponing repayment or lowering interest rates. Alternatively, the government could let some banks fail while rescuing others and move more quickly to implement painful reforms required by the IMF, in hopes of restoring investor confidence.

Another option: An additional cash infusion from developed countries looks like a long shot. There is little enthusiasm in the United States for extending further assistance to Seoul—U.S. banks' and corporations' lending exposure there is comparatively small, partly because of the many restrictions on foreign trade and investment in Korea.

As of Oct. 8, the most recent date for which data were available, loans by private U.S. banks and corporations to Korean enterprises totaled only $10.6 billion, or 2.9 percent of U.S. lending worldwide, according to the Federal Reserve. U.S. banks could probably write off their Korean loans entirely without much pain, analysts said.

Still, many experts worry that Korea could pose an indirect threat to the United States if it were to generate new pressures on already beleaguered financial institutions in Japan, many of which have extensive business relationships with U.S. banks and firms. Japan is one of Korea's biggest foreign creditors, and its banks are scrambling to stay above the minimum capital levels required by international banking standards before March 31, the end of their current financial year.

C. Fred Bergsten, director of the Institute for International Economics in Washington, argued that the link between Korea and the Japanese banks lends credibility to the domino scenario. He sees a calamitous chain of events in which the inability of Korean firms to repay their Japanese creditors forces Japanese banks to boost reserves by selling shares at home, driving down the value of the entire Japanese stock market, battering the yen and "sending shock waves all through Asia."

"In my view, Japan is teetering very close to the brink, and a [financial] moratorium in Korea would be another big, big shot," Bergsten said.

An estimate being widely circulated in Japan puts Japanese bank lending exposure in South Korea at only $24.3 billion at the end of 1996—a fraction of the $570 billion in bad loans now on Japanese bank books, according to the Ministry of Finance. And some experts reckon Japanese loans to Korea have been pared by 25 percent over the past six months.

"The financial issue has been overblown," said Jesper Koll, chief economist at J.P. Morgan & Co. in Tokyo. "A 1 percent decline in the value of the Tokyo property market would do much more damage than having to write off Korean loans altogether."