International banks extend loans to South Korea to ease crisis

The world's largest banks are poised to extend some of the $100bn (pounds 63bn) of outstanding loans to South Korea, in an attempt to stop the crisis from spiralling across the world's financial markets. As Chris Godsmark in London and Stephen Vines in Hong Kong report, the talks came as Korea agreed to make sweeping financial reforms.

The series of meetings held in the world's big financial centres yesterday fuelled speculation that lenders were preparing to extend loans to South Korea. The discussions follow mounting fears that Korean banks will default on foreign currency loans, which have soared in value after the collapse of the country's currency, the won.

The US central bank, the Federal Reserve, held separate meetings in New York with US and foreign lenders in an attempt to quantify their exposure to Korea. Most loans are thought to be short term, lasting up to 12 months, and analysts suggested they could be rolled over by between a further three months and a year. The extension would provide a breathing space while the International Monetary Fund (IMF) arranged up to $60bn of financial help for South Korea.

Representatives from UK banks held separate meetings in London, led by HSBC, which has assumed a coordinating role. HSBC said it would be rolling over loans maturing in January which would have been extended "in the normal course of business" but a spokeswoman emphasised that the bank had not yet agreed to extend all its Korean loans.

German banks, the most heavily exposed to Korea after Japan's, confirmed they had held talks with the Bundesbank and the German finance ministry. Deutsche Bank, which is leading the German talks, pledged to "safeguard the stability of the international financial system". Meanwhile, some 10 Japanese banks met in Tokyo and were also thought to have agreed to extend credits to Korea.

According to figures issued by the Bank for International Settlements (BIS), outstanding loans by private financial institutions to South Korea at the end of 1996 amounted to about $99.5bn, with those from Japanese firms at $24.3bn.

German and French banks have most to lose if Korean finance houses default on foreign commercial debt. Lenders in the two countries built up much of their exposure from 1993, attracted by spectacular growth rates in the tiger economies in Asia compared with recession in their home markets.

Salomon Brothers, which is advising the Korean authorities on the crisis, estimated that Banque Nationale de Paris (BNP) had leant up to $25bn to the Far East, including Korea, while Deutsche Bank's exposure was $22bn, or 10 per cent of its total lending.

Matthew Czepliewicz, banking analyst with Salomon Brothers in London, said the crisis could hit European banks' profits next year. "They have extremely low bad debt provisions at the moment so it wouldn't take much to upset their earnings growth", but he suggested this left room to cover provisions if Korean businesses were unable to pay their debts.

As bankers gathered to play their role in relieving the Korean crisis, legislators in Seoul finally started to bite the bullet on passing the legislation required to comply with the IMF's tough terms for its bail- out. Last week, the IMF said it would accelerate the handover of the first $10bn of aid if Korea implemented reforms.

Working against a tight timetable they tackled 13 financial reform bills and reached agreement on the most controversial which will bring supervision over the banking, securities and insurance industry under one agency. They also agreed to scrap the ceiling on foreign ownership of South Korean shares. The optimism was reflected in the foreign currency markets yesterday where the Korean won continued to gain ground, ending the day at 1,395 against the US dollar, compared with Friday's close of 1,498. The won had touched a low point of 2,000 just before Christmas.

Korean equity markets were unable to react to the new mood yesterday because the stock market was closed. However, the Tokyo stock market, preoccupied with its own concern about insolvencies, slumped at one stage to its lowest point in two and a half years. The key Nikkei 225 index, however, only fell 0.2 per cent, after recovering from a 300 point fall in early trading.

The big lenders

Loans to South Korea by overseas banks at end of 1996

Japan $24.3bn

Germany $10.0bn

United States $9.4bn

France $8.9bn

United Kingdom $5.4bn

Total loans $99.5bn

Source: Bank for International Settlements