World sends South Korea $10bn. But is it enough?

Euphoria swept South Korea's battered financial markets yesterday as they responded to the international community's `Christmas gift' of a $10bn cash transfusion to avert debt defaults. Steven Vines reports.

The South Korean won, which has seen 50 per cent of its value wiped out since July, staged a record recovery, with a rise of almost 24 per cent. At one point in yesterday's trading it had surged by 31 per cent against the US dollar.

The stock market, which has been no less battered than the local currency, also took heart, rising by almost 7 per cent, more or less making up the ground lost in a record-breaking price fall on Monday which greeted President- elect Kim Dae Jung's comment that he was "flabbergasted" about the state of the nation's finances.

Although the emergency transfusion of funds from the International Monetary Fund (IMF) and 13 other countries, including Britain, averted the real threat of debt default, the size of South Korea's foreign debts in comparison to its foreign-exchange reserves suggests the measures will hardly dent the mood of pessimism.

South Korea is believed to have short-term debts of $100bn (pounds 62bn), $15bn of which are due for repayment in the next few days. The total foreign debt could be as high as $200bn. Last week South Korea's foreign reserves stood at little more than $10bn. Attempts to get Seoul's creditors to roll over their loans provided futile. Hence the emergency which led to the scramble at the beginning of the week to prevent the potentially biggest default in history. When South Korea's financial markets reopen on Monday they are almost certain to slip back.

They may well follow the pattern seen in Japan, where the Tokyo stock exchange saw a 5 per cent rise on Christmas Day in response to the rescue package announced on Christmas Eve. Yesterday that rise turned into a 3.25 per cent drop as investors rubbed their eyes and realised the threat of widespread corporate bankruptcies had not receded.

South Korea is now in line to receive $78bn in loans from the IMF and other institutions. In return the IMF has pushed a battering-ram through the door of the highly protectionist and heavily state-influenced South Korean economy, which rose to be the world's 11th- largest and managed to keep foreign investors confined to the outer fringes.

In addition to a raft of financial market liberalisation, transparency and other measures forced on Seoul, the IMF has used the emergency package to squeeze yet more concessions. All restrictions on foreigner access to bond markets will be swept aside, while access to other capital markets will be further liberalised.

The restructuring of the financial sector, which in practice means widespread closures and mergers of ailing institutions, will be stepped up.

On the trade front, the iron doors keeping out imports will be thrown open and trade- related subsidies, which helped make South Korean goods highly competitive in foreign markets, will be cast aside.

Letters, page 17