Government agrees terms for IMF loan

By John Burton in Seoul and Phil Halliday in London, The Financial Post, Monday 1 December 1997

South Korea said early this morning that it had reached agreement with the International Monetary Fund on terms for a loan to rescue its economy. However, later statements stepped back and confusion grew over the deal.

Lim Chang-yuel, the Korean finance minister, announced the unexpectedly swift conclusion of the deal after late-night talks with the IMF. He gave no details.

Mr Lim said the deal must still be approved by Michel Camdessus, the IMF managing director, with whom he would talk by telephone today.

I expect the IMF board meeting to be held midweek to ap-prove the agreement and money can be brought in as soon as they approve it, Mr Lim said. Asked how much Korea would receive under the IMF package, Mr Lim said: That’s not for me to say.

The deal comes less than a week after Hubert Neiss, the head of the IMF’s Asia-Pacific department, arrived in Seoul to lead a 17-member delegation in negotiations with Korea.

Yesterday government officials suggested the IMF would soon extend the first tranche of a $15bn-$20bn loan, but the size of the bailout remained unclear.

The US, Japan, the World Bank and the Asian Development Bank are expected to contribute to the IMF-led rescue, which could reach $60bn and would exceed that offered to Mexico in 1995. But the US and Japan have said they want to review the IMF loan terms before committing themselves to the bailout.

Before Mr Lim’s statement, state-run broadcasting said Korea was resisting an IMF demand that it close three troubled commercial banks and 12 indebted investment banks immediately. Korea prefers trying to restructure them first and sees liquidation as a last resort. The threatened commercial and investment banks are technically insolvent because of loan defaults by bankrupt conglomerates and financial investments in south-east Asia that have gone sour.

The IMF has said foreign banks should be allowed to participate in mergers and acquisitions of Korean financial institutions, while the nation’s capital markets should be opened fully to foreign investors.

Korea was also opposing IMF demands that economic growth in 1998 should be slowed to between 2.7 and 2.8 per cent compared with 6 per cent this year, while Seoul wanted a percentage point higher growth rate.

Slower growth combined with an IMF condition that interest rates rise to 18-20 per cent—nearly five times the inflation rate—would lead to extensive corporate restructuring as Korea’s highly-leveraged industrial conglomerates would be deprived of generous bank financing.

Analysts yesterday said the unemployment rate could more than double to 6 per cent next year as unprofitable businesses are shut, although Korea’s rigid labour laws might make mass redundancies difficult.

It was uncertain whether foreign banks would be satisfied by the IMF loan terms and resume lending to Korea. The calling of short-term loans by foreign banks triggered Korea’s debt crisis and forced Seoul to go to the IMF for aid.

International bankers and investors have demanded stringent IMF conditions, including flexible labour laws, immediate closure of insolvent banks, more privatisation and corporate transparency. If the IMF fumbles, we could have another Korean debt crisis in six months, said a foreign banker about the response to weak IMF terms.