South Korea to sign record $55bn IMF bail-out package

South Korea is likely to sign an agreement for a rescue package with the International Monetary Fund (IMF) today, which will lay the basis for the biggest economic rescue in history. In Hong Kong Stephen Vines reports that the price of the rescue will be high and examines the chaotic negotiations to extricate Seoul from its economic crisis, while Lea Paterson in London looks at a tough-talking report on Japan.

The IMF is expected to contribute $20bn (pounds 11.8bn) to a $55bn bail-out with the balance coming mainly from Japan, the United States and the Asian Development Bank. This tops the $50bn bail out for the Mexican economy two years ago.

First signs of the price to be extracted emerged yesterday when the Korean government was reported to have suspended the licenses of nine merchant banks. However in the currently confused atmosphere prevailing in the capital Seoul, news of these suspensions came not from the government, which remained silent, but from the stock exchange which suspended trading in the companies' shares.

Reports from Seoul say that 12 merchant banks and two commercial banks are about to keel over under the pressure of bad debt. The IMF is insisting on restructuring of Korea's manifestly inadequate financial institutions which will involve both closures and shotgun marriages of ailing banks with more solidly based institutions.

The Korean government is finding it hard to come terms with the humiliation of seeking the bail-out. Negotiations have proceeded by fits and starts with the government sending mixed signals about its willingness to bow to IMF demands.

However, it is becoming clear that ordinary Koreans will shoulder a heavy burden in consequence of this rescue. A predicted agreement with the IMF to reduce economic growth next year to 3 per cent, is estimated to push unemployment up to around 6 per cent of the workforce, compared with the current level of some 2.5 per cent.

The Korean economy has enjoyed an astonishing average level of growth of 8.6 per cent per year for the past three decades. This sharp reversal is unpalatable for many Koreans. Kim Dae-jung, the veteran opposition politician who may well triumph in the pending presidential elections, has pledged to renegotiate the terms of the IMF agreement.

The battle weary Korean stock market registered another fall of just over 4 per cent, while the fast shrinking local currency hit a new low with a further fall of 3.5 per cent against the US dollar.

For a change Korea's woes did little to affect sentiment elsewhere in Asia yesterday. Most Asian stock markets registered gains on the back of a strong performance on Wall Street on Monday and a surge in Japan on the same day.

The mood of cautious optimism was seen most clearly in Hong Kong where the blue-chip Hang Seng Index registered of gain of over 4 per cent, and, for the first time this month, climbed steadily throughout the day without being dragged down by selling pressure.

Share prices in Tokyo fell back only marginally after profit taking kicked in following Monday's surge.

Talk of government intervention also helped firm up the value of the Yen as the influential Organisation for Economic Co-operation and Development (OECD) yesterday warned the Japanese government to take care not to damage further the embattled economy.

In its annual survey of Japan, the OECD also predicted the recent turmoil in other parts of the Far East could threaten future Japanese growth. The OECD said: "The recent financial difficulties of some South East Asian countries could have a marked effect on Japanese business sentiment and export growth to that region".

Recent economic troubles in Japan mean that Gross Domestic Product (GDP) will grow by less than 1 per cent in 1997, the OECD predicted.

The OECD cautioned the Japanese government against interest rate hikes, saying that "an early tightening of monetary policy does not seem to be warranted in the current economic environment". Easy monetary conditions, that is maintenance of the historically low levels of interest rates in Japan, "would also help restore the health of the banking system".

A rapid fall-off in government spending could also damage future economic growth, the OECD cautioned in its survey. The OECD said: "Care should be taken to avoid too rapid a withdrawal of government support to the economy in the short term". The Japanese government intends to reduce public investment in the coming years to try and reduce its budget deficit. The general government deficit rose to around 4 per cent of GDP in 1996, one of the largest in the OECD area.

Rather than slashing public spending, the OECD suggested that the Japanese government introduce structural reforms to try and balance its budget.