Outlook: No more money for South Korea

There is probably no alternative solution to South Korea's ever- deepening crisis but to throw a large quantity of international money at it. The trouble is that the $57bn of IMF and other credit already doled out may not be enough, as the markets were beginning to anticipate yesterday. Nor is there any certainty that this hastily arranged package will in practice buy sufficient reform in South Korea to tackle its deep rooted structural faults. Would it not have been better in the long run to have allowed Korea to go to the wall?

A number of conditions have been attached to to the IMF's support, but there is not much evidence of South Korea taking real responsibility for its economic ills. Nor, given the haste with which this package was agreed, can the IMF have any more than a superficial understanding of the nature and scale of South Korea's difficulties. No real banker would lend on such terms, and there must be more than a chance the IMF will end up regretting it.

There is scarcely any point in the IMF and other lenders stumping up the emergency loan unless it leads to root and branch reform. All it achieves is a bail-out of the banks and other financial institutions that have lent to South Korea.

The Mexican crisis that exploded at the end of 1994 offers a good parallel. It took two months for the terms of its international rescue package to be agreed. But that stand-by loan of $50bn, settled in early February 1995, did not stabilise the peso. It went on to lose another third of its value on the foreign exchanges.

The currency only stopped falling once the Mexican Government admitted its mistakes, set in place new budget and privatisation policies, and said there would be a recession. After a year in the doldrums, the economy has since recovered, and Mexico never drew all of the emergency loan. It even repaid money ahead of schedule.

There has been a grovelling apology from the Korean President over the scale of the crisis and some rotten investment banks have been closed. But essentially there has been no Mexican style mea culpa from the Korean authorities, nor will there be ahead of next week's presidential election. The question is whether whoever is installed then will make it plain that badly needed reform of the banking system and corporate sector will take place. The precedent set by worker unrest a year ago over modest proposals for labour market reform is not encouraging.

If South Korea does remain unwilling to bite the bullet, it will call into question the purpose of the emergency loan. The IMF is proud of its ability to respond quickly to crises, but this year it has all but exhausted its emergency fund with credits for Thailand and Indonesia as well as Korea. It should not have been so swift to agree to the Korean request.

Now that it has done so, it finds itself in an awkward situation. Should it carry on disbursing the loan even if the country does not implement the tough conditions properly, throwing good money after bad? Or should it halt the loan whatever the political and economic consequences of doing so?

In the end, it boils down to how much worse the repercussions for the rest of the world economy and financial system would be if the Koreans had to fend for themselves. Would the resulting loan defaults and turmoil in Asian and other emerging markets fatally damage the international banking system or plunge the OECD into recession? Probably not is the answer. The IMF must be hoping beyond hope that the Korean government will do enough to meet its conditions. But if it does not, it should let Korea face the consequences of its own decisions.