Cavalry is on the way, but it may be too late

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The Independent Online
The announcement of the International Monetary Fund's massive rescue package for South Korea has failed dismally to stabilise the country's financial markets. Diane Coyle, Economics Editor, asks whether the IMF cavalry will win in the end.

Two things have made the financial markets doubtful about whether the $57bn (pounds 34.5bn) emergency credit arranged for South Korea will be enough to bring the crisis to an end. One is the scale of the overseas debts the loan has to cover. The other is whether Seoul is willing to correct the policy mistakes that got it into such a mess in the first place.

South Korea's short-term overseas debts are now put at $100bn, the bulk of its total debts. Although some of this reflects lending between branches of Korean banks and companies, some $40bn is thought to need refinancing in the next two weeks.

The IMF itself is putting forward $21bn in credit, $5.56bn of which it has already lent, with another $5.58bn available by 8 January. If this turns out not to be enough to stabilise the currency, the World Bank will chip in with $10bn, Japan $10bn, the US $5bn and the Asian Development Bank $4bn.

Amongst six smaller lenders, Britain has offered to make available $1.25bn if necessary via a loan from the Bank of England. The international officials who negotiated this package, the biggest emergency financing arrangement of its kind yet, believe that it is big enough - provided Seoul adheres to the conditions set down by the IMF. Indeed, they expect that none of the loans apart from the IMF contribution will actually need to be drawn.

Financial analysts are less convinced. Lim Chang Yuel, South Korea's finance minister, admitted the foreign currency reserves have fallen to just $10bn, less than a single month's worth of imports. It is not completely clear that the funds are in place to repay all the debts that will come due in the short term, even though the government has said it will guarantee all the corporate debts.

Even well-known names amongst the conglomerates, like LG and Hyundai, have debt-equity ratios in the region of 350-450 per cent, according to official statistics. The tighter interest rate policy the IMF has imposed on South Korea will push up the cost of servicing debts, causing serious cash-flow problems.

The real doubts, however, concern the prospects for implementation of the IMF conditions. Apart from the standard fund medicine of raising interest rates and slashing government budgets - the IMF being a great believer in the theory that if it isn't hurting it isn't working - these include restructuring the financial sector, opening the economy to more foreign trade and investment, redrawing the corporate sector and making the jobs market far more flexible.

This is no small programme, and any government would hesitate to embrace these terms - never mind a new government not involved in negotiating the deal in the first place.

Michel Camdessus, the IMF's managing director, has expressed his confidence that Seoul will stick to the deal. Privately, fund officials say the government will have no choice, because otherwise it will not get the emergency loans and would have to default on repayments.

Even so, many in the financial markets are highly critical of the South Korean government's attitude to the crisis. An analyst who did not wish to be named said: "We haven't yet seen any sign from the Korean authorities that they accept any responsibility for the crisis or are willing to take corrective actions." Few expect to get those signs before next week's election. But South Korea will have less than a month between then and the disbursement of the succeeding tranche of IMF credit in the New Year to persuade foreign investors that it is willing to be rescued.