December 12, 1997
Korea Must Renegotiate Bailout
Or Risk Default, Economists Say
An INTERACTIVE JOURNAL News Roundup
The battered South Korean stock market staggered through
another punishing day Friday amid widening concern that
the country's $57 billion bailout package, huge as it is, may
not be big enough.
South Korean share prices plunged
7.1%, reaching their lowest levels in
10 years. The benchmark index slid
26.69 points, to 350.68. Meanwhile,
the South Korean won appeared to
be headed for another staggering
one-day loss, but government
intervention steadied the currency,
which managed to finish the day with
a gain.
The central bank's intervention
pulled the currency back from a
four-day plunge in value. In early
trading Friday, the won opened at its
daily permissible low of 1891.40 per
dollar. But it strengthened to 1600
after the central bank sold dollars for
won. With foreign-exchange trading
thin as Koreans clutch their
remaining dollars, the central bank's
won-buying packed a wallop.
Later in the day, the won lost ground
again, as merchant banks and
importers, desperate to hold U.S.
dollars to meet their foreign currency liabilities, bought
dollars with won. At the end of the trading day, the Korean
currency stood at 1,710 won to the U.S. dollar, compared
with 1719.8 won on Thursday.
At the same time, fears of widespread bankruptcies
heightened, as Dongsuh Securities Co., the country's
fourth-largest brokerage house, said it would file for
receivership after failing to honor maturing debts. It was the
second brokerage firm to collapse in as many weeks.
With the won melting down, many bankers and economists
are saying that South Korea must either renegotiate the
International Monetary Fund-led bailout or risk large-scale
defaults on international loans.
The won fell by the regulatory limit every day this week but
Friday, helping to fulfill the very prophesies of financial
doom that have dragged the currency down. A vicious cycle
took hold: Borrowers scrambled to buy dollars before the
won fell more -- and in the process, they bid down the value
of the Korean currency further still. Despite Friday's signs of
life, the won's recovery remains uncertain.
The lower won makes it difficult for Korea's government,
banks and companies to pay off their heavy
foreign-currency borrowings, more than $100 billion of
which comes due in less than one year.
A Blow to Korean Pride
The won's fall has also stung Koreans' pride by knocking flat
their mighty industrialized economy: Measured using
current exchange rates, the Korean economy would only
have ranked last year as the world's 20th-largest, about the
same size as Argentina, and down from Korea's 11th-place
rank at the beginning of the year. Playing off public dismay
at the country's problems, two of three candidates in next
week's presidential election have been promising to try for
better terms from the IMF. But one of them, Kim Dae Jung,
flip-flopped on Friday morning and promised foreign
investors he would stand by the agreement.
Despite reports that Korean officials seek to change the
terms of the pact to get funds disbursed more quickly, IMF
and U.S. officials don't see any immediate need to change
the agreement, reached Dec. 3 after weeks of tense
discussions. Implementation of the IMF program is "the
absolute key to ... re-establishing confidence in the financial
market," Treasury Secretary Robert Rubin said. "They've
taken important steps but there's a lot that remains to be
done and that is the key to success."
IMF and U.S. Treasury officials say South Korea must carry
out the reforms to which it has agreed before there can be
any talk of new money. The IMF is to release an additional
$5.6 billion by Jan. 8, if Korea eases restrictions on foreign
investment, as promised, and makes its banking system more
accountable to market forces. The Asian Development
Bank plans to make $2 billion available by Jan. 1. The
World Bank, which has pledged $10 billion, is scurrying to
finish negotiations with Seoul, and announce its schedule for
loans, by the new year.
However, an IMF official on Friday said South Korea's
central bank may secure a short-term bridge loan from the
Bank of Japan. The official, speaking on condition of
anonymity, confirmed Korean press reports that there is
movement toward providing temporary funding to Korea.
Reports suggest that up to $5 billion could be made available
to Korea by Japan, which is a figure that the official said is
around the amount being discussed.
Korea's finance minister, Lim Chang Yuel, said that, with
bailout credits totaling $15 billion being injected into Korea
this month, "there is no reason why the financial
community has to worry."
But international bankers said, and the continued
depreciation of the won signaled, that the question isn't
whether Korea will need a new bailout, but when. "There's
going to have to be more money made available," said
Deutsche Bank Asia-Pacific economist Angus Armstrong.
"The won will just keep going down until a new package is
negotiated."
Foreign Lenders Wary
Foreign lenders are increasingly reluctant to extend or
renew loans and credit facilities to Korean banks; the banks
in turn are short of the dollars needed to roll over loans to
the country's debt-heavy conglomerates, known as chaebols.
Korea's debt load is enormous. The country's offshore
borrowing totaled $120 billion as of September, about half
of which is short term. The government this week conceded
that Korean corporations hold an additional $51 billion of
off-balance-sheet financing, in the form of short-term
local borrowing by foreign units.
Because most of that is short-term debt, the country could
face a huge cash call. But as of Thursday, the government's
usable foreign-exchange reserves were an anemic $10
billion, said the Finance Ministry, down from $22.5 billion
at the end of October.
In addition to the $10 billion Korea has on hand, the IMF
has pledged to deliver about $7.5 billion more in loans by the
end of January, on top of loans it already chipped in under
the bailout pact. But by the end of January, Deutsche Bank
estimates that $22 billion of Korea's borrowings will come
due. "That's a gaping hole," said Deutsche Bank's Mr.
Armstrong.
Citing the prospect of a liquidity squeeze, Standard & Poor's
cut South Korea's long-term foreign-currency credit rating
by three notches to BBB-minus, just one level above
junk-bond status, from A-minus, while Moody's Investors
Service trimmed the country's rating to Baa2 from A3, a
two-notch downgrade. A $2 billion international bond issue
for this week was delayed by state-owned Korea
Development Bank.
Such problems will complicate what now appears inevitable:
a fresh round of Korean negotiation with the IMF, Japan
and the U.S. As the won falls and the burden of servicing
Korea's debt rises, the IMF may face an unappetizing choice:
raise more cash for Korea, or let Korea's banking system
implode, unable to meet its international obligations.
Where additional money would come from is unclear,
whether from the IMF or other countries. Congressional
opposition has complicated the U.S. Treasury's participation
in the past four IMF rescue packages, beginning with
Mexico's in 1994.
Disturbing Signs
Even if the IMF can renegotiate a new package that will
stabilize the won, economists say, Korea Inc. shows
disturbing signs that it isn't taking the original agreement
seriously enough. Between the end of October and early
December, the government deposited about $10 billion into
the overseas branches of Korean commercial banks to help
them meet short-term debt payments. That has exasperated
international economists, who were assured Korea's offshore
banking affiliates would have to fend for themselves, said
P.K. Basu, economist at UBS Securities in Singapore. "Now
the Bank of Korea is trying to shore up all the Korean
entities," said Mr. Basu. "It boggles the mind."
The country's rescuers continue to push for firm reforms.
The government has diligently opened its equity and bond
markets; foreigners can now own 50% of a listed company
and can purchase bank-backed corporate bonds with a
maturity of more than three years. But interest rates will
have to climb to tempt investors, say analysts.
That could exacerbate what is widely feared: a renewed crop
of failures that could reach the country's top 10
conglomerates, a critical source of much of Korea's
economic growth and of investment in emerging economies
world-wide.
Among the key conditions of the IMF agreement is a
commitment to keep interest rates high and to curtail public
spending. That means public-works projects, the lifeblood of
the construction companies around which many chaebols
are built, will dry out at a time when the domestic market is
being opened to foreign competitors. Demand from
Southeast Asia, which accounted for 70% of Korean
contractors' orders overseas, has also diminished as the
region grapples with its own economic woes. And the
construction companies' principal asset, Korean real estate,
has been steadily shedding value.
Rising interest rates will make it difficult for Korean
construction companies to retire their debt. Some are
preparing for the worst. Half of the 300 middle managers at
the construction affiliate of Anam Group, Korea's
26th-largest conglomerate, resigned to help the company
"lose weight in these tough times," said a spokesman.
"The construction sector is extremely vulnerable," said
Stephen Marvin, head of research at Ssangyong Investment
& Securities Co. "And that means no chaebol is safe."
Even the cheaper won isn't expected to turn Korea Inc.'s
fortunes around. Although a weak local currency enhances
the price competitiveness of Korean goods overseas, the glut
in Asian manufacturing capacity and weak regional demand
keeps prices of everything from cars to semiconductors at
painfully low levels. Sales may grow, economists say, but
profitability may decay.
"Excess capacity for a range of goods plagues the region,"
said Mr. Marvin. "Korea's export volume growth will
decelerate abruptly, or unit prices will utterly collapse."
Even medicine that seems safe for Korea jars it. The
country's lingering impulse to curb foreign investment, even
in a liquidity crunch, must be dismantled. "I just tried to buy
some Korean stocks today, and I couldn't because you have
to have some sort of foreign institutional investors license,"
said Mr. Basu. "They don't have the luxury of making those
sorts of decisions. They should open the market immediately
and totally."
--Staff reporters Steve Glain, Michael Schuman and
Darren McDermott in Seoul prepared this article, with
additional contributions from Namju Cho in Seoul and Bob
Davis in Washington. |
