Paul Fiondella, Asia meltdown No 2:
.S. Mulls $5 Billion Loan To Seoul; World Bank Frees Up $3 Billion
WASHINGTON -(Dow Jones)- The U.S. is considering the actual use of the
so-called second-line of credit to South Korea as signs of market confidence
continue to wane at the same time Seoul appears increasingly willing to move
rapidly on reforms, an international monetary source said Tuesday.
Meanwhile, the World Bank moved Tuesday to approve an emergency $3 billion
loan to South Korea as the financial turmoil in Asia deepened over worries
about the possibility of broader based loan defaults among troubled private
and public debtors.
A World Bank spokesman underscored the institution's commitment to
bolstering Asian generally at a time of crisis, and to Korea specifically.
But he also underscored at a press conference called to review the unusually
rapid disbursement to Korea that the bank isn't going to serve as the
financial fireman of Asia.
The World Bank's action came as fears grew Tuesday that South Korea's
economy is on the verge of collapse following media reports that the
country's foreign debts now total a whopping $200 billion and comments by
President-elect Kim Dae Jung that his nation faces the risk of default within
two days unless international donors provided immediate aid.
The senior monetary official, speaking on condition of anonymity, said
while he doesn't necessarily expect the U.S. to move immediately to unleash
its $5 billion pledge to Korea, there has been movement toward that step.
A spokesman at Kim's National Congress for New Politics denied the report.
The World Bank's $3 billion outlay represented the first from a $10 billion
pledge to South Korea. The credit is part of a $35 billion package of
multilateral credits from the International Monetary, the World Bank and the
Asian Development Bank that forms the backbone of the $57 billion support
effort for Korea. The other countries pledging the remaining $22 billion line
of credit would likely follow the U.S.'s lead, according to the official.
"The U.S. has become more interested in deciding whether the second line
needs to be activated," the international monetary official said, adding that
currently that doesn't necessarily mean the credit will be unleashed.
So far, the IMF has disbursed $9 billion to Korea and at least another $2
billion will be coming on Jan. 8, according to the current schedule. The
Asian Development Bank is also providing front-line funding to Korea, and
Japan's central bank has recently approved a $5 billion credit line to its
Korean counterpart amid continued pressure on Korea's official reserves.
South Korean government officials, although acknowledging that foreign-debt
obligations have grown since September, denied they are anywhere near $200
billion. And Kim's party said his comments were misinterpreted.
Nevertheless, South Korean financial markets were roiled by the reports, as
well as by news that Moody's Investors Service and Standard & Poor's had cut
Korea's long-term foreign currency rating to "junk" levels.
The South Korean won plunged 12.5% Tuesday to an all-time low of 1,962 won
to the dollar, compared with 1,715 won to the dollar Monday. The key stock
market index plunged 8%, or 29.70 points, to finish at 366.36.
Interest rates, measured by yields on three-year corporate bonds, rose 1.11
percentage points to an all-time high of 31.11%.
Kim, who will take office Feb. 25, told party members Monday that he was
astonished by the gravity of the country's financial woes after examining its
financial books.
"I can hardly sleep after hearing reports (from economic ministers) .... We
may go bankrupt tomorrow or the day after tomorrow," Kim said at the meeting,
according to a report in the influential daily Chosun Ilbo. "Without
emergency (foreign-currency) injection from foreign countries, the economy
will be ruined," the newspaper quoted him as saying.
Observers now question whether the $57 billion bailout package will be
enough to stem the financial crisis.
Kim's party called the foreign media's interpretation of his comments a
misunderstanding, saying the newly elected president was using a Korean
figure of speech to emphasize the gravity of the country's financial crisis,
not indicating that a national default is imminent.
Meanwhile, the local press quoted Deputy Finance and Economy Minister Kang
Man-soo as saying loans to local financial institutions from overseas
branches now totals $67.8 billion, and borrowing by local companies overseas
totals $40 billion. Including those two figures, the country's total
foreign-debt obligations surpass $200 billion, which is much higher than the
$119.6 billion estimated in September, the local press said.
The government also denied those reports, saying that although total debts
may have edged up from September, "the total figure in no way adds up to $200
billion."
Nevertheless, the press reports combined with the ratings downgrades
intensified fears that the government will be forced to declare a moratorium
on foreign-debt repayments, analysts said.
S&P late Monday lowered South Korea's long-term foreign currency rating by
a stunning four notches to single-B-plus, from triple-B-minus. The new credit
rating leaves South Korea several steps into S&P's speculative grade ratings,
and puts the country on an equivalent rating with countries like Pakistan,
the Dominican Republic and Venezuela. At the same time, Moody's downgraded
South Korea's foreign-currency country ceiling for bonds to Ba1 from Baa2 and
the foreign currency ceiling for bank deposits to B1 from Ba2.
The downgrades will make it tougher for foreign banks to roll over
short-term credits placed with South Korean institutions.
"A lot of banks are now cutting off credit lines to Korean companies so the
situation is getting pretty serious," said a head of research at a large
foreign bank in Singapore. "There is more than a 50% chance now that Korea
may have to declare a moratorium. Three months ago that was unthinkable, but
now it's not unthinkable," he said.
There are serious doubts that South Korea's usable foreign-currency
reserves, which stood at $10 billion on Dec. 11 but are estimated to have
dwindled since then, will cover the country's short-term obligations even
with funds from multilateral donors such as the IMF. South Korea's short-term
foreign debts due this year are estimated at around $15 billion. Even if the
nation manages to meet its obligations this year, economists say South Korea
will have to play an exhausting game of catch-up to cover maturing short-term
foreign liabilities into 1998.
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