International Bankers Debate
Plan for South Korea's Rescue
Following this week's remarkably unified effort to roll over short-term loans
to South Korean banks, divisions are beginning to emerge among international
bankers over what comes next.
By Wall Street Journal Reporters Stephen E. Frank, Matt Murray, Michael
Schuman, Namju Cho and Christopher Rhoads
Far from portending a collapse of the bailout effort, however, the emerging
split suggests the South Korean government may have more options at its
disposal than first thought.
"There's a broad range of things we should contemplate," said an official at
the International Monetary Fund, who has been following this week's talks.
"As long as the rollovers are holding, [the Koreans] have time to come up
with a plan."
Long-Term Goals
So far, the divisions are most apparent among commercial and investment
bankers in the U.S., who have been spearheading the private sector's
involvement in the Korean bailout. With billions of dollars in loans
outstanding to their Korean counterparts, U.S. banks have a lot at stake in the
bailout's success or failure.
Now that the rollovers have bought them a few weeks' time to deal with the
cash crunch, the banks all agree on their long-term objectives. They include
replenishing the Korean government's depleted foreign-exchange reserves and
converting the short-term debt owed by the country's banks into debt with
longer maturity dates.
But beyond their existing commitments to Korea, bankers are also hungrily
eyeing the fat profits that would accompany management of any transactions
to resolve the crisis. Such transactions could include straightforward loans or
bond issues, or a more complicated conversion of private bank debt into
government-backed bonds.
That last possibility is at the heart of a proposal being advocated by bankers at
J.P. Morgan & Co. The J.P. Morgan plan calls for the exchange of at least
part of the short-term bank debt for government-issued bonds with maturities
of one, five and 10 years. This move would remove the debt from the Korean
banks' books, while offering investors the security of a government
guarantee.
J.P. Morgan Plan
Bankers familiar with the plan say as many as half of such a bond offering --
which would be worth at least $15 billion, and possibly as much as $20 billion
-- would consist of a debt exchange, with the remaining new money injected
into the government's coffers.
A rough draft of the plan was presented to bankers in New York Monday, and
to the Korean government Tuesday. That has prompted criticism from some
of J.P. Morgan's rivals, some of whom said they were surprised by the
company's aggressive advocacy of the proposal.
"When this thing first broke, Morgan seems to have already decided what they
wanted to do next. That sort of surprised me, because it didn't seem to me that
that was where we were," said a senior banker close to the talks. "I think for a
bunch of bankers to sit around New York and decide what the Koreans need
without talking to the Koreans is a little nutsville."
Ready to Accommodate
As U.S. banks struggle to find solutions to ease South Korea's economic crisis,
officials in Seoul are saying: We're ready to accommodate the banks'
proposals.
Unless a long-term solution is found, fears of a default may repeatedly
resurface as more short-term loans come due. The continued shakiness of
Korea's financial status doesn't put the country in a strong position to bargain
with international creditors. "We're not in a position to state our preference,"
said a finance ministry official.
Korean government officials are noncommittal on the proposal to swap bank
debt for government bonds, saying only that it is currently under
consideration. But some officials stress the government is willing to
accommodate what foreign banks' want.
"If foreign lenders want government securities in exchange for loans, we will
be in a position to do that," said Chin Young Wook, director of the financial
policy department at the Ministry of Finance and Economy. Mr. Chin points
out that new legislation passed by the National Assembly allows the
government to directly issue bonds. The government started selling a
dollar-denominated bond to local investors Wednesday, and had planned to
raise an estimated $9 billion in bonds abroad early this year.
Mr. Chin also held out the option of government guarantees of foreign loans
to Korean banks. The National Assembly recently permitted the government
to guarantee $20 billion in foreign loans, although it's still unclear exactly
how the guarantees will be used.
President-elect Kim Dae Jung and his team of economic advisers seem to be
willing to go along with any plan the government's technocrats approve. "The
party will agree with the decision [the] current government makes," said Park
Sang Yi, an aide to an emergency economic committee formed by Mr. Kim.
Pressure on Won
Continued volatility in Korea's currency markets underscored the economy's
continued need for foreign support. The Korean currency sank 8.6%
Wednesday to 1,695 won against to U.S. dollar. For the year, the won has lost
half of its value. Korea's currency market is closed for a holiday until
Monday.
What drove the won down, bankers say, is demand for dollars from importers
settling end-of-year bills, as well as companies needing to pay off foreign
debts. Bankers expect continued volatility in the won market in coming weeks
as companies will still need to scramble to find dollars to pay foreign debts.
The promised rollovers and accelerated IMF aid will help the country's
financial position, but it may take time for liquidity to be restored in the
foreign-exchange market.
Korea had external liabilities of $156.9 billion at the end of November,
including the obligations abroad of Korean banks and their branches, with
$92.2 billion of that short term. The won will "be on a roller coaster," said an
executive at a Korean bank.
Despite such complications, U.S. bankers say Korean officials -- who are
expected to meet with bankers in New York next week -- might be surprised
by the number of alternatives available to them. "Everybody's going to talk to
them. We've got a number of different ideas," said one banker involved in
this week's talks. "The competition may then work to Korea's advantage."
One Shot at a Rescue?
Bankers advocating the Morgan proposal argue that a single, massive bond
issue involving a debt exchange is Korea's best hope for an economic rescue.
"Investors have been traumatized by the Korean crisis," said one banker
involved in the talks. "I would think that if the Koreans are going to go to the
market in January or early February, they're going to get one shot at this."
But rival bankers suggest that with the rollovers running smoothly so far and
the IMF's $57 billion bailout package beginning to take effect, Korea's
bargaining position is growing stronger by the day. "Why should the
government go on the line and bail out the commercial banks? Only if it's the
only alternative. But it isn't," one banker said. "If investors are convinced that
the rollover plan and the IMF stabilization plan are working, then they'll
come back on board again, because everybody believes the economy is
fundamentally sound."
Such renewed investor confidence would make converting bank debt into
government debt a costly alternative to other approaches, such as bank loans
or a series of traditional bond issues by the government or the state-run Korea
Development Bank, this banker said.
Along those lines, some bankers are suggesting it's too early to come to any
conclusions about what Korea needs to do, and that their first priority is to
give the situation time to settle down. "It's relatively early days and our
attentions have been focused on getting this [rollover] agreement tacked
down," said John Crean, a senior executive vice president of credit and risk
management at Bank of Nova Scotia who has been helping coordinate
Canadian banks' response to the crisis. "One can put together
term sheets very quickly. The real key is how a term sheet fits within the
structure of needs, in this case of the Koreans. The situation is still very
confused."
That wait-and-see approach is also favored by European banks, which
together are much more exposed to South Korea than their American
counterparts. European bankers say they aren't ready to back any specific
proposals until they gather more information about the status and amount of
their outstanding loans there.
"I don't think it's possible on such short notice to have an overall agreement
which would allow all the banks to go ahead on a common basis," said one
Swiss banker. "To have a comprehensive view, we need more time and
information." |
