long korean story that illustrates that they seem to be taking deregulation seriously--don't know if hashimoto can be as bold!!
Behind the S. Korea Bailout: Speed, Stealth, Consensus
By Paul Blustein and Clay Chandler
Washington Post Staff Writers
Sunday, December 28, 1997; Page A01
As the South Korean economy was careening toward catastrophe a week ago, a top U.S. Treasury official named David Lipton tried to slip unobtrusively into Seoul to negotiate the terms of a new financial rescue package.
The stakes were enormous. South Korea had become a symbol of an Asian financial crisis that was threatening to widen into a global problem. Its currency was in a free fall, and financial markets in neighboring Japan were shaky. Seoul had become a test of the ability of international bankers and finance ministers to stanch the bleeding. And as always when the international financial club does its urgent business, secrecy and speed were crucial.
But when Lipton arrived at Kimpo International Airport last Sunday, the 44-year-old undersecretary of the Treasury was ambushed by a throng of South Korean reporters thirsting for any news about the financial crisis. The next day, newspapers prominently displayed a picture of him in blue jeans and sports shirt, clutching his passport and looking startled. All they got from him, however, was a "no comment" about the reason for his mission.
By Christmas Day, the world had learned what was behind Lipton's visit -- an emergency $10 billion infusion of cash to avert an imminent default on Seoul's international loans.
The new rescue plan, coming just three weeks after the stalled $57 billion bailout package announced Dec. 3 by the International Monetary Fund, quickly calmed financial markets in Seoul and Washington. On Friday, the first day of trading after the bailout was announced, the South Korean currency, the won, rebounded nearly 23 percent.
What follows is an inside account of the bailout negotiations, provided by some of the key participants. It's a story of secret meetings in Washington and Seoul, conference calls spanning three continents and intense discussions at the White House, which produced, in just a few days, an unusual consensus among the barons of the new global economy.
There had been brave talk earlier this month of letting Korea fail -- and pay the price for years of economic mismanagement. But when the crunch finally came last week, the bankers and finance ministers decided that a new rescue effort would be less costly than a default.
"When you were staring it in the face, when the reality of more difficulties in the region were confronted, people became a little less willing to take the risk, and a bit more willing to say, 'Let's give this [rescue] one more try,' " a senior IMF official said.
A decisive moment, officials said, occurred during a meeting last Monday in Seoul between Lipton, U.S. Ambassador to South Korea Stephen Bosworth and President-elect Kim Dae Jung at the headquarters of Kim's party, an unassuming 18-story building nestled amid a cluster of banks.
The 73-year-old Kim, a longtime champion of South Korea's militant labor unions, told Lipton that he recognized that job losses were inevitable because of the harsh terms of the rescue package -- and he promised he would work closely with labor unions to gain their cooperation, an aide recalled.
Though Kim said he would seek general wage reductions to hold job layoffs to a minimum, a participant at the meeting recalled Kim saying, "My first priority is the competitiveness of the Korean economy. Job security must come second."
Kim's comments helped persuade the Clinton administration and IMF officials that Seoul was serious about restructuring its closed and debt-ridden economy. That, in turn, reassured bankers that if they agreed to roll over their loans to Seoul -- rather than demand repayment and force default -- they would eventually be repaid.
Whether the latest rescue will work, or whether it has simply created new problems, remains to be seen. Crises such as these are notorious for producing quick solutions, but leaving longer-term problems for later.
But a look at how the rescue was cobbled together shows that the participants wrestled with some of the painful dilemmas that are inherent to bailouts of national economies.
An overarching problem, officials said, was what economists call "moral hazard," a concern that arises in any bailout: Once borrowers and lenders become convinced that they'll be saved from the worst consequences of their risky decisions, chances increase that they will behave recklessly in the future.
For Treasury Secretary Robert E. Rubin, the crucial issue throughout the South Korean negotiations was maintaining the stability and integrity of the financial markets. Rubin, a former trader with the giant investment banking firm Goldman Sachs & Co., has spent much of his life dealing with financial markets. He believed that half-baked attempts to solve the crisis in South Korea risked undermining the credibility of the markets themselves.
Rubin and other U.S. officials signed on to the IMF's initial Dec. 3 rescue because they believed it would persuade international banks and global investors to keep money and credit flowing to South Korea. If they did that, most of the $57 billion might not even be needed, Rubin reasoned.
But to the horror of the plan's architects, by mid-December only 10 percent to 15 percent of the banks were rolling over their short-term loans. On some days, as much as $1 billion was flowing out of South Korea, a senior IMF official said. The won and South Korean stock prices, which rallied briefly after the unveiling of the Dec. 3 package, plummeted almost daily.
The fault, as far as the IMF and the Clinton administration were concerned, lay almost entirely in Seoul, where the powerful Finance Ministry, which had guided South Korea's growth for three decades by steering bank loans to favored industries, was balking at giving up control of the financial system, even though the system was awash in bad loans.
"There were about 10 days there where it's fair to say the Koreans were acting as if they were not going to do the program," another top IMF official said. "Instead of getting on and doing the program, they kept asking us for more money publicly. . . . That helped destroy the confidence of the markets."
Adding to the markets' pessimism were statements by then-candidate Kim Dae Jung suggesting that he would demand a renegotiation of the IMF package if elected president.
Back in Washington, worries were mounting at the State Department, the Pentagon and the National Security Council that if South Korea went bankrupt, it would be plunged into a prolonged period of political and social unrest that would raise the risk of a bloody conflict with the unpredictable communists in North Korea.
At meetings in the White House Situation Room, Secretary of State Madeleine K. Albright, Defense Secretary William S. Cohen and National Security Adviser Samuel R. Berger sought to convey the urgency of their concerns to Rubin and his deputy, Lawrence H. Summers.
But Rubin and Summers saw no hope that South Korea's financial prospects would improve unless the markets saw evidence that Seoul was getting religion about the need for far-reaching reform. Rubin publicly rejected pleas by the South Korean Finance Minister, Lim Chang Yuel, for the United States to immediately disburse its $5 billion portion of the initial $57 billion bailout package.
In the White House meetings, a participant recalls, "Rubin was basically giving his 'tough love' message, which is that you can have all the security reasons in the world, but you can't keep putting more money into Korea unless you make a judgment that it's going to work."
Not that Rubin and Summers weren't concerned. Through most of this month, they were talking daily about the deteriorating South Korean situation with Federal Reserve Chairman Alan Greenspan and his top international aide, Edwin "Ted" Truman, as well as with senior IMF officials. And they monitored the situation in Seoul through conference calls -- often twice a day, early in the morning and late at night, from home -- with Lim, the finance minister, who speaks English.
Behind their tough talk, both the Treasury and the IMF were leaving open the possibility that they might accelerate transfer of the billions of dollars South Korea needed to pay its bills, but only if the South Koreans agreed to accelerate their economic restructuring program.
That bargain started to look like a distinct possibility around the time of the Dec. 18 South Korean election, because the Finance Ministry had at last taken steps to ease its choke hold on the economy. For example, the ministry had lifted its upward cap on the movement of interest rates and its 10 percent limit on daily currency fluctuations. And although Kim Dae Jung's victory, and his unwise public comments, were frightening the financial markets, he and his camp were sending reassuring messages to Washington.
"His people were telling us that they could do a better job than their predecessors on the labor markets, because the labor unions trust them," a senior IMF official said. Kim had personally delivered a similar message to IMF Managing Director Michel Camdessus on the phone the day he was elected, the official added.
Another crucial piece of the puzzle began to fall into place in mid-month when Seoul-based representatives of big international banks, alarmed over the prospect of default, initiated their own bailout discussions. They explored the idea of giving the South Koreans some breathing room by granting extensions on the billions of dollars of short-term debt that would be coming due soon, when South Korea was desperately short of foreign currency.
The Seoul-based foreign bankers, 40 or 50 of whom informally meet each month at the Chosun Hotel, had been among the first to spot signs of trouble. As early as October, many of them had begun to warn home offices in the United States, Europe and Japan that South Korea's reserves of foreign currencies were dwindling to dangerously low levels.
Japanese banks, already under pressure because of bad loans at home, were particularly aggressive about cutting their credit lines to South Korean borrowers. So were medium-sized banks from other countries. Had this pressure continued unabated, it might have forced a sudden and convulsive South Korean default, the aftershocks of which would have rolled across the global banking system.
But as the noose was tightening around Seoul's neck, bankers representing some of the large U.S. and European financial houses were beginning to conclude that saving South Korea by providing short-term loans might make good business sense.
"What you were coming down to was a group of core banks that see a future for doing business in Korea," a financial industry official said. "This economy is going to shrink over the next year or two, but it will recover, and these are banks that have a long-term strategy for being in Korea, one way or another."
Although the banks' willingness to accept deferred payments was still not a sure thing, word that they were considering granting such relief came as enormously welcome news to the Clinton administration -- and not only because of the benefits it offered the South Koreans. By showing that private lenders were bearing some of the burden of the rescue, White House and Treasury officials believed they could deflect criticism that taxpayer money was being used to bail out rich bankers.
At a White House meeting on Friday, Dec. 19, Rubin and Summers told the group in the Situation Room that they would agree to a package of accelerated U.S. loans to South Korea, based on the expectation that the banks would come through and the South Korean authorities would step up their moves to revamp the economy.
President Clinton signed off on the idea that afternoon and Lipton was dispatched to Seoul that weekend, along with Hubert Neiss, the head of the IMF's Asia Department. At the Treasury Department, meanwhile, Summers contacted his counterparts in the Group of Seven major industrial nations, with whom he had been in regular consultations, and told them that the new rescue plan was moving forward. Still, no word had leaked to the press.
But just as final preparations were underway early last week, the crisis worsened again. A growing number of South Korean banks were refusing to extend credit to companies and bankruptcies were mushrooming. Financial markets crashed anew Tuesday after reports that Kim had emerged from his meeting with Lipton and told his political allies that he was "shocked" by the state of the nation's finances -- and that default "could happen tomorrow."
But Lipton was deeply impressed by what he had heard in his meetings with Kim and his top economic advisers, such as You Jong Kuen, a former economics professor at Rutgers University. On Wednesday morning, You recalled, Lipton confided to him: "We are trying to put together a package. I think we will be able to work something out."
A little more than 12 hours later, the deal was done. Finance Minister Lim and central bank governor Kyung Shik Lee signed a letter to the IMF's Camdessus that contained a number of new promises to accelerate reforms and liberalize markets.
Rubin cut short a bone-fishing vacation to announce the agreement on Christmas Eve in Washington, grumpily telling a group of reporters that he had spent so much time on the phone the previous day that he had been unable to do any fishing. In Seoul, morning newspapers on Dec. 25 hailed the IMF's "Christmas present" to the nation.
Blustein reported from Washington and Chandler from Seoul.
WON RALLIES ON PLAN NO. 2
After two months of declines, the South Korean won rebounded sharply Friday after the second bailout plan was announced.
Dec. 3: IMF reaches agreement on a $57 billion bailout plan for South Korea.
Dec. 18: South Korea elects Kim Dae Jung as president.
Dec. 25: Agreement reached on second bailout plan, for $10 billion. Won rises nearly 23 percent the next day.
SOURCE: Bloomberg News |
