By Paul Blustein
Washington Post Staff Writer
Thursday, December 25, 1997; Page A01

The world's richest countries and the International Monetary Fund yesterday launched a fresh effort to prevent a collapse of the cash-starved South Korean economy, announcing that they will speed $10 billion in emergency loans to Seoul.

The move, which was orchestrated by the Clinton administration, represents an acknowledgment that the $57 billion Korean rescue package announced three weeks ago has failed to ease Seoul's financial crisis.

The new package includes $2 billion from the IMF and $8 billion from a group of wealthy nations, including Japan, the United States and Germany. The funds already had been promised to Korea in the rescue plan, but the loans are being disbursed by the end of this month and in early January, in a reversal of previous official insistence that Korea wouldn't need the loans until much later -- and probably wouldn't need them at all.

The new bailout plan represents a consensus within the financial establishment -- the secretive, clubby world of finance ministers, the IMF and powerful private banks -- that emergency steps were needed to prevent the Korean banking crisis from becoming a wider global problem. This group moved quickly and quietly this week, drafting the plan in secret meetings and globe-girdling conference calls.

As part of the initiative, private banks in the United States, Japan and Europe that have lent money to Korea have been asked to negotiate deferred payment of the more than $100 billion they are owed in the next 12 months, and possibly to provide new longer-term loans to Korea as well.

Six top U.S. banks announced yesterday afternoon after a meeting at the Federal Reserve Bank of New York that they expect to comply with the request, and will begin discussions soon with other institutions among Korea's creditors.

The effort to rush money to Seoul was presaged by Tuesday's World Bank announcement that it would break with its standard procedures and speed $3 billion of its portion of the rescue plan. The efforts are aimed at stemming a panicky flight of foreign capital that has left Korean banks and companies bereft of funds and sent the nation's stock and currency markets into a free fall.

The original bailout plan was supposed to restore confidence, by convincing investors and lenders that Korea would restructure its debt-laden economy and could get its hands on the U.S. dollars and other "hard" currencies it needed to pay its obligations to foreigners. The idea was that as confidence returned, foreign banks would renew lines of credit and replenish the coffers of Korean financial institutions.

But yesterday, the rescue plan's architects were forced to admit that they needed to fortify the plan, in the face of relentless pressure in Korean financial markets.

"It was our view that we needed to take another group of steps," Treasury Secretary Robert E. Rubin told reporters yesterday. "They should work. On the other hand, there are no guarantees. But it is enormously in our economic and national security interest that economic stability be restored in Korea."

The IMF, which is leading the rescue effort, issued a statement declaring that its managing director, Michel Camdessus, intends to recommend to the board of the 181-nation institution "a significant acceleration of the resources available to Korea." Both Rubin and the IMF stressed that, in exchange, the Korean authorities have agreed to "an intensification and acceleration" of measures to revamp the nation's economic policies.

As recently as last week, Treasury and IMF officials were adamantly declaring -- publicly and privately -- that there was no need to change the rescue package or provide funds to Korea any faster than originally scheduled.

Rubin had specifically rejected Korean pleas that Washington provide its $5 billion portion of the rescue package early, asserting that the U.S. pledge -- along with those of other countries -- was intended to be a "second line of defense" that would be used only if the IMF and World Bank loans proved inadequate.

Keeping the U.S. loan in reserve was important politically to Rubin, who drew intense criticism during the 1995 rescue of Mexico for having committed $20 billion in U.S. funds to the bailout of that country. Indeed, at the time the Korean rescue package was announced, Rubin said Seoul would probably never have to draw the U.S. loan.

Yesterday, however, Rubin acknowledged that several developments had undermined the assumptions behind the initial package -- even though he continued to maintain that it was "a strong program" that should have revived market confidence.

Rubin noted that the Korean authorities initially signaled "uncertainty" about their willingness to implement painful restructuring measures, particularly steps that could entail layoffs and bankruptcies. The nation was also in the midst of a presidential election, raising doubts about whether the new president would adhere to the plan. Those factors added to investors' anxieties, and intensified the selling pressure in Korean markets.

Moreover, Korean officials unintentionally deepened market fears by going public with their pleas for emergency loans. "In terms of how they . . . handled discussions, with regard to markets, perhaps things could have been done more effectively," Rubin said.

But Rubin said that "another factor is what's gone on in Japan," suggesting that Asia's largest economy should bear a portion of the blame for having failed to take sufficient steps to restore economic growth in the region. The Treasury has been prodding Tokyo for months to adopt a more stimulative policy and thereby help boost the ailing economies of its Asian neighbors by increasing demand for their products.

Whatever the causes of yesterday's new rescue package, the Treasury may now face intensified criticism that by going to such extraordinary lengths to bail out faltering countries, it is saving rich banks and investors from the losses they should incur for making risky financial bets.

"The purpose of this is not to help creditors and investors. The purpose of this is to help Korea," Rubin said, but he admitted: "A byproduct is, we help investors and creditors."

Rubin argued that the new package should not be criticized as a bailout for banks because it includes provisions for foreign banks to share in the burden.

Statements issued yesterday by Rubin and the IMF contained phrases asserting that the speeded-up loans were being provided "in the context of a significant voluntary extension of the maturities of existing claims by international bank creditors" on Korea."

Asked if that means that banks will be effectively forced to take losses or reduced interest payments on their loans, Rubin said it would depend on how negotiations go between the banks and Korean borrowers. He was even less forthcoming when asked whether private bank cooperation was necessary for the disbursal of loans by the U.S. government and other parties to the rescue package.

"The advantage of the way [the statement] is drafted is that it speaks for itself," Rubin said.