US rejected Korea's request for finance

South Korea approached the US for emergency financing last week before having to turn to the International Monetary Fund. As Mary Dejevsky reports, the disclosure threatened to embarrass the Americans as they tried to use the summit of Pacific Rim nations
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The Independent Online
As the first IMF inspectors started work in Seoul yesterday, South Korea mounted a forceful defence of its economic record, seeking to distinguish the underlying strength of its economy from the debilitated state of the other faltering tiger economies.

In what appeared to be a rehearsal of South Korea's position for the Asia-Pacific Economic Co-operation (Apec) summit, which opened yesterday, a team of senior South Korean economic officials set out to clarify the reasons why South Korea had called in the IMF.

Leading the team, Kim Ki Whah, ambassador at large for economic affairs, said there had been "insufficient understanding" of current economic conditions in Korea and "inadequate understanding of the background" to the call to the IMF. He insisted the fundamentals of South Korea's economy were "very sound" and that the government had been largely successful in tackling the country's $24bn (pounds 14bn) current account deficit.

If the present trend continued, he said, the deficit would be reduced to $14bn for 1997 - 3 per cent of GDP compared with 5 per cent for last year. This, he said, had been achieved with little effect on overall growth, which was forecast to average 6 per cent for the current year, compared with 7.1 per cent in 1996. Exports were growing strongly, and unemployment, at 2.5 per cent, remained low.

Korea's problems, he said, had been precipitated by a credit squeeze, which had led to a wave of bankruptcies, and exacerbated by the fall of the Hong Kong stock market, which caused a sharp deterioration in international confidence. The result had been "a very sharp liquidity shortage", but a short-term one.

Initially, the government had thought it could arrange emergency financing to tide the country over "without bothering the IMF".

But, he added: "Korea approached its closest allies, and the universal advice was that Korea should go to the IMF." In other words, although Mr Kim stressed the brevity and informality of the conversations and the tentative nature of Korea's enquiries, the US (perhaps of likely opposition from Congress) and Japan (probably because of its own economic problems) had turned Korea down.

South Korea's officials expressed confidence that negotiations with the IMF would go smoothly, saying that the IMF remedies would be little different from those already prescribed by the country's own new deputy prime minister and economic supremo.

The measures include the halving of the proportion of Korean banks' non- performing loans, from 6 per cent to 3 per cent of the total, just slightly more than the equivalent percentage in the US; a pruning of financial institutions; and a big widening of the band within which the value of the Korean currency, the won, may vary against the dollar, from plus or minus 2 per cent to plus or minus 10 per cent.

The government will also undertake to make public statistics for the country's foreign debt.

The pain to Korea of having to call in the IMF was clear from officials' insistence that Korea might not need the full $20bn in assistance, let alone the additional sums mooted by some analysts.

Despite refusing Seoul's request for assistance, Washington officials at Apec backed South Korea's optimistic prognosis, using it to "talk up" international confidence in the region's economies.