By Paul Blustein and Kevin Sullivan
Washington Post Staff Writers
Wednesday, December 24, 1997; Page A01

The World Bank yesterday approved an emergency $3 billion loan to South Korea, which is scrambling to stave off the disastrous prospect of a default on its debts to foreigners.

The loan was larger than any the World Bank has previously made, and it was also unprecedented in the speed -- two weeks -- with which it was prepared and disbursed.

The bank, which normally lends money to poor countries for specific projects such as electric power systems and hospitals, often takes up to a year or more to plan how its funds will be used. But the bank rushed funds to Seoul because "we are not prepared to see [Korea's] success story go down the tubes," said Mark Malloch Brown, the bank's vice president for external affairs, at a news conference.

In a separate effort to cope with Korea's deepening crisis, commercial banks based in the United States, Europe and Japan have begun talking with the Korean authorities about deferring payments on the nation's foreign debts, according to Danny Leipziger, the leader of the World Bank team negotiating with the Koreans.

Postponing debt payments is one of the few remaining options to stabilize the rapidly-imploding Korean economy. The country is dangerously low in its reserves of the "hard" currencies, such as U.S. dollars, Japanese yen and German marks, that it needs to pay the $100 billion that is owed by Korean banks to foreign creditors over the next 12 months.

Allowing more time before the debt payments are due would give Korea some desperately-needed breathing room. Korean banks have already cut back severely on their lending to companies because of their shortage of dollars, and that has raised fears that the economy will grind to a halt for lack of credit.

Expressing hope that discussions between the foreign bankers and the Korean government will succeed, Leipziger said: "We welcome a process that would help restore normal commercial relations" in the Korean economy. But the talks are still at an early stage, and it is far from clear that they will lead to fruition. A bank executive in Seoul said no formal negotiations have taken place.

News of the World Bank loan helped stabilize the South Korean currency, the won, in early trading today in Seoul, analysts said, following yesterday's precipitous 14.4 percent decline against the dollar. This year, the won has lost 57 percent of its value against the dollar.

Asia's continuing financial turmoil also jolted Wall Street yesterday, with the Dow Jones industrial average falling 127.54 points to close at 7691.77, almost all of the damage coming in the last 30 minutes of trading. [See story, Page C1.]

Underscoring the depth of Korea's plight, President-elect Kim Dae Jung was reported to have said yesterday, after being briefed on the financial situation, that national bankruptcy is imminent.

"We don't know whether we would go bankrupt tomorrow or the day after tomorrow," Kim told a meeting of his party on Monday, according to Chosus Ilbo, a major Korean daily. "I can't sleep since I was briefed. I am totally flabbergasted. . . . It's a matter of one month, no, even one day."

A spokesman for Kim's party, Kim Min Seok, sought to clarify the comments, saying that the president-elect "did not mean there was a real possibility of a national bankruptcy but wanted to express his willingness to undertake restructuring with sincerity," according to Reuters.

But the report of Kim's remarks sent Korea's battered financial markets into a tailspin yesterday. The Seoul stock market fell by 7.5 percent, its biggest one-day percentage decline in history; it was down another 3.68 percent in late afternoon trading today. And the 14.4 percent decline in the value of the won Tuesday brought it to 1,962 won per dollar, an all-time low. By late afternoon today, it had recovered somewhat, trading at 1,860 won to the dollar.

The renewed turmoil in the market reflected mounting fear that South Korea would end up in default even though it already has received several billion dollars in loans from abroad, the first installments of a $57 billion international rescue package led by the International Monetary Fund. That package, which was provided on condition that Seoul implement a painful restructuring of its economy and financial system, was aimed at restoring investor confidence in Korea and convincing foreign bankers to renew credit lines to the country's financial institutions.

But the IMF-led bailout, announced Dec. 3, has failed to reverse the flight of foreign capital, and investor pessimism has intensified since Thursday's presidential election. Kim's victory unsettled the markets in part because he suggested during the campaign that he would seek to renegotiate the terms of the IMF bailout, particularly provisions that would entail layoffs.

In his reported comments to party officials yesterday, Kim reiterated that he is committed to the reforms mandated by the IMF rescue. Kim also said he had erred by raising the possibility of renegotiating the terms during the campaign.

At the World Bank news conference, bank officials said they have a legitimate reason for throwing so much money into rescuing Korea, because a collapse of the economy there would pose a threat to the whole East Asian region, which has been the world's most successful at eliminating poverty.

"We cannot, as a development institution, stand idly by while this extraordinary economic achievement of East Asia is put in jeopardy," Malloch Brown said.

The World Bank, which has pledged to lend Korea up to $10 billion as its part of the rescue package, ostensibly lent the $3 billion for specific purposes -- to help reform the Korean financial sector and support improvements in the nation's social safety net. But Malloch Brown said, "We make no bones about the fact" that simply by adding to Korea's badly depleted reserves of foreign currencies, "we are contributing to market confidence."

Ordinarily, loans to replenish a country's currency reserves are made by the IMF. Malloch Brown said the World Bank does not intend to extend similar loans to other countries. But he said the Korean case was extraordinary, in part because of Korea's record as having been a "model borrower" during the 1960s and 1970s when it went from being an impoverished nation into one of Asia's most dynamic industrial economies.

Sullivan reported from Tokyo, Blustein from Washington.