The entire South Korean Cabinet decided tonight to resign to take broad responsibility for a multimillion-dollar loan scandal that has rocked President Chun Doo Hwan's government amid widespread rumors of high-level political involvement.
The surprise action, knowledgeable observers in Seoul said, was designed to limit political damage from a huge loan swindle allegedly perpetrated by a distant relative of Chun that has brought financial turmoil to South Korea. In a related move, Chun ordered a major shake-up in his ruling Democratic Justice Party today, including the firing of key leaders.
Prime Minister Yoo Chang Soon is expected to submit all the 22 Cabinet ministers' resignations to Chun Friday morning to give the 52-year-old former general a free hand in refashioning his government. New Cabinet appointments were expected to follow quickly.
The resignations were submitted and Chun accepted 11 of them, news services reported early Friday, although Yoo and 10 others were asked to stay on.
In announcing the decision reached at a 10-minute emergency meeting this evening, Lee Kwang Pyo, minister of culture and information, said the Cabinet would step down to assume "political and moral responsibility" for the scandal and other recent events that have proved acutely embarrassing to the Chun government.
These incidents, which have raised public doubt about the effectiveness of Chun's Cabinet, include the massacre of 56 civilians by a rampaging policeman last month and a subway construction cave-in in Seoul two weeks earlier that killed 10 persons.
But the loan scandal, in which an uncle of the country's first lady was arrested on charges of bribery and influence-peddling earlier this week, has proven by far the most embarrassing to Chun, who came to office in March 1981 pledging to root out corruption in business and government circles.
In the other major housecleaning move by Chun today, Democratic Justice Party Secretary General Kwun Jung Dal, chief party spokesman Pong Du Wan and chief party policy-maker Na Sok Ho were forced to step down.
Kwun, an Army general turned politician, was instrumental in carrying out the military coup that brought Chun to power in the chaos that followed the assassination of president Park Chung Hee in October 1979. He is also credited with a key role in organizing the government party that brought Chun to the presidency, and his loss, observers in Seoul said, represents a severe political setback for Chun.
Named to replace Kwun is Kwon Ik Hyun, a provincial party leader about whom little is publicly known.
The loan scandal began two weeks ago with the arrest of former national assemblyman Lee Chul Hee and his wife, Chang Yong Ja, related to Chun by marriage. The couple is charged with defrauding six Korean companies in a private loan scam in which they allegedly netted $210 million in questionable loans and commercial paper deals.
The scandal--and the political controversy surounding the Chun government--deepened Tuesday with the arrest of Lee Kyu Kwang, a former brigadier general and an uncle of the president's wife, on charges of accepting $142,000 in bribes from Chang to exert his influence in arranging government approval for a joint banking venture with Saudi Arabian interests being promoted by Chang's husband.
Lee, who is also Chang's brother-in-law, resigned as president of the government's Korean Mining Promotion Corp. last weekend. Prosecutors said today that Lee was indirectly linked to the loan scandal but had no direct role in arranging illegal loans from two government-run banks to financially troubled Korean industrial firms that had also borrowed money from the couple.
The scandal has led to the arrests of 16 business executives, including two former bank presidents, driven two leading companies into bankruptcy and caused a serious slump on South Korea's stock market.
Prosecutors said they investigated rumors of party involvement but found no evidence linking politicians to the loan scam. Observers in Seoul said, however, that it was too early to tell whether the prosecutors' report and Cabinet resignations would defuse what they characterized as the most serious political challenge of Chun's rule.
Chun appointed his latest Cabinet in January in a sweeping face lift designed to restore confidence in the sluggish economy by giving key positions to leading figures in banking and industry.
Its apparent demise comes almost two years to the day after the bloody, student-led uprising in the southern city of Kwangju in May 1980.
Nearly 200 Koreans were killed when Chun's troops moved in to crush the revolt. Despite a residue of bitterness over the incident in religious dissident and political activist circles, Chun has gained an increasing measure of confidence among the broad public through his efforts to restore political stability.
Observers in Seoul suggested, however, that the loan scandal could help shake that confidence.
Special correspondent Young H. Lee contributed to this report from Seoul.