Jim Levi in London looks at the latest attempts to find a solution while Stephen Vines in Hong Kong watched as the Asian currencies continued to tumble.
A Korean government official, Chung In Young, said discussions with US bankers in New York, including a proposal to convert some of its commercial loans into sovereign debt, were proving "positive". London banking sources were also confident that the international financial community would agree its own bail-out plan for South Korea by tomorrow.
Korea's foreign creditor banks are believed to have up to $100bn of short- term loans outstanding to the country's banks and industrial companies. The bulk of those loans are due for repayment this year.
The international banks are in urgent meetings with Korean officials in New York in a bid to stitch together an agreement aimed at rescheduling this debt. This is likely to include swapping $15bn of the commercial debt into sovereign debt. The creditor banks are themselves under pressure from central bankers and the International Monetary Fund (IMF) to do a deal.
As the talks finished last night, neither side was willing to comment on any progress that might have been made. If they fail to reach agreement by tomorrow a loan of $8bn promised by the G-7 leading industrial nations will not be made. That loan is part of a $57bn IMF rescue package put together by its officials in November.
US Treasury Secretary Robert Rubin applied a measure of political pressure, saying America was "enormously concerned" about the financial crisis in South Korea. "We want to enable South Korea to return to a position of financial stability," he said
One key to achieving that goal would be to put reforms in place that would address the issue that gave rise to the problems in the first place, he said.
Japanese banks have the biggest exposure to Korean borrowers with $24.3bn of short-term loans outstanding at the end of June. Britain's exposure is relatively small. According to the Bank of England, loans to Korean companies at the end of June last year totalled $6.1bn, of which about $4bn was due for repayment within six months or less. HSBC, acting as co-ordinator in the negotiations on behalf of British banks, is believed to be optimistic about the outcome.
Parallel discussions are taking place over Korea's longer-term debt problems to foreign banks. Initially, the focal point for these talks appears to have been a controversial scheme floated last week by JP Morgan. It proposed Korea's bank creditors buy $15bn of Korean government bonds on condition that the Korean government itself bought out around $7bn or $8bn-worth of debt the Korean banks owe foreign banks.
But many banks felt that such a plan to increase the Korean government's exposure to the debt problem would not be welcome as it would send the wrong signals to the IMF, which had already agreed to lend it huge sums. A new plan to deal with this longer-term debt issue is under discussion but no details have been released. One suggestion is that the new plan will involve a massive new Korean government debt issue. The package might also include the outright sale of control of certain Korean banks to overseas interests. Last week the Korean government announced plans to sell off two of its weaker banks, Seoul Bank and Korea First Bank.
Meanwhile, Asian financial markets began their first full week of new year trading with currencies plunging to new lows and the focus of concern shifting to Thailand and Indonesia. In Thailand, Prime Minister Chuan Leekpai said yesterday that his would be seeking to renegotiate the terms of the $17.2bn bail-out with the IMF.
The IMF had demanded that Thailand produce a budget surplus equivalent to 1 per cent of its gross domestic product in the 1997/98 fiscal year. Mr Chuan said that it was unlikely this target could be met. "We have cut spending substantially," he said, "but shortfalls in revenue will be as high as 100bn baht (pounds 1.3bn), which makes it important to adjust the (IMF) plan."
In Indonesia, the local currency fell almost 10 per cent yesterday to a record low of 6,700 against the dollar ahead of today's budget. The rupiah has lost more than 60 per cent of its exchange value since July. Some of the fall has been caused by local investors who are worried that the country will not be able to meet its short-term debt commitments, triggering defaults.