Korea swallows its pride and asks IMF for help

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The Independent Online
South Korea bit the bullet yesterday, and appealed to the International Monetary Fund for an emergency loan to end its financial crisis. The prospect of an international rescue package - the third in Asia this year - boosted the region's financial markets.

Richard Lloyd Parry in Tokyo and Diane Coyle in London weigh up the IMF's chances of ending the Asian turmoil.

The Seoul stock exchange surged by 3.6 per cent and the Korean won, which has lost more than 20 per cent of its value since the beginning of the year, strengthened from 1139 to 1065 against the dollar after a junior finance minister announced that the government had finally decided to seek financial support from the IMF. South Korea has requested $20bn (pounds 12bn) in the form of a stand-by credit.

Lim Chang Yuel, the newly appointed minister of finance and economy, said: "The IMF loan is not a bail-out loan. It's a stand-by credit. It is backing up the liquidity shortage. An IMF loan has the advantage of stabilising the market quickly."

After a meeting in Seoul with Stanley Fischer, deputy director of the IMF, Mr Lim said that the amount would be enough to resolve the "difficulties" in the foreign exchange market. But financial market analysts were sceptical, as the country's short-term foreign currency debt is thought to amount to around $70bn with perhaps $20bn-$30bn falling due before the end of this year.

South Korea's difficulties have become critical in the last few days, as the plunge in its currency, coming after an extended economic slowdown, has raised anxieties among international banks about the ability of Korean companies to pay their debts. Banks in Japan, which have already begun failing under the weight of bad loans, have become particularly reluctant to extend credit to Korea.

When similar currency crises hit Thailand and Indonesia over the summer, they received loans from the IMF, other international institutions and foreign governments, including Japan. The IMF has put up $3.9bn of a $17.2bn loans package for Thailand and $10bn of a $40bn package for Indonesia.

The loans will be drawn as needed by the authorities in each country to meet the credit needs of the domestic banking system. But assistance has been made conditional on tough economic austerity programmes and on restructuring the ailing banking system.

Although no details of the terms of the IMF "conditionality" in Korea's case have been released, it will be a more complicated deal because of the scale of the problem and the political sensitivities of the Koreans. As the world's eleventh biggest economy, Seoul's problems dwarf those of the South-east Asian countries where the currency contagion first incubated in the early summer.

The government's secrecy makes the extent of its problems difficult to judge, but it seems likely that the IMF will eventually be called upon to organise its biggest rescue package ever. The Mexican rescue package in 1995 amounted to a stand-by credit of $50bn, although it was not fully drawn down.

Some estimates of Korea's needs range as high as $100bn, almost twice the combined amount bestowed upon Thailand and Indonesia, and even the least alarmist reckon some $40bn will be necessary to reassure the markets.

This is deeply unpalatable to many Koreans, who pride themselves on their forced march from division and civil war in the 1950s to the top ranks of the industrialised nations. A year ago, the country was admitted to the Organisation of Economic Co-operation and Development, the "rich nations' club" based in Paris.

As a newly developed nation, Korea is not automatically entitled to the same kind of loans as Indonesia and, until a few days ago, Korean officials were haughtily dismissing the very idea of relying on international charity as unthinkable.

They would prefer to receive help from individual governments, and the last few days have seen an intensive, and unsuccessful, behind-the-scenes effort to lobby the US and Japan. Both countries, along with Australia, insist that they will co-operate only as part of an IMF-led effort.

The problem for the Korean government is that the IMF's stringent conditions will prove domestically unpopular. "When the IMF regime comes into place, bankruptcies of weak South Korean companies will become the daily event," said Lee Seung Yong, an analyst at Shinhan Securities in Seoul yesterday.

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