S. Korea, IMF Agree on Plan for Bailout

South Korea reached an initial agreement today with the International Monetary Fund on terms of a massive financial bailout package for its troubled economy.

“We working-level officials have worked out a plan,” Finance Minister Lim Chang Ryul said after meeting with IMF officials late into Sunday night. “I did my best. I’m optimistic.”

The agreement was to go to South Korean President Kim Young Sam and IMF Managing Director Michel Camdessus for final approval, Lim said. Camdessus is expected to sign the agreement after arriving in Seoul later this week. The first loans are then expected to be disbursed almost immediately. The Korean stock market opened quietly, but later began to fall, with the main index down 2.4% in the late morning.

Terms are expected to be released later today after the plan is presented to the cabinet, Lim said. When South Korea announced Nov. 21 that it would seek an IMF bailout, Lim said Seoul’s initial request for immediate funding would be for $20 billion. But Lim has acknowledged the total will be much larger, and most private analysts expect it to be more than double that amount.

State-owned KBS Television reported today that the final package would total about $55 billion, including $20 billion from the IMF, $15 billion from other international institutions, and $20 billion from Japan and the United States.

Japanese Finance Minister Hiroshi Mitsuzuka said Friday that Japan will contribute to the package if Seoul reaches an agreement with the IMF. Washington’s position is less clear, but the U.S. is also likely to participate in some form.

IMF Asia-Pacific Director Hubert Neiss, who led the IMF delegation in Sunday night’s talks, said the agreement won’t be final until it is approved by the IMF board. “The work is not yet completely done,” Neiss said.

“I expect the IMF board meeting to be held midweek to approve the agreement and money can be brought in as soon as they approve it,” Lim said.

The entire package is conditional on Seoul taking steps to strengthen its basic economic structure. Those measures are expected to include efforts to shut down or merge overextended banks and are likely to bring slower economic growth next year.

South Korea’s financial crisis was triggered by a string of corporate failures this year that led to ballooning bad loans at the nation’s banks. Banks responded by tightening credit, which led to more company failures and more non-performing loans.

Seven large conglomerates have financially collapsed this year, and domestic banks are now estimated to hold about $60 billion in bad loans.

In recent months both the stock market and the currency crashed, foreign investors fled, and it became clear that an IMF rescue would be needed to prevent default on foreign debts.

South Korea, the world’s 11th-largest economy, has about $110 billion in foreign debt, including about $20 billion due this month and $50 billion more that matures in 1998.

Among conditions discussed in the negotiations, according to South Korean media reports, were an IMF request for South Korea to set a 1998 growth rate target of 2.5%, which would be the slowest in 18 years. Seoul would prefer faster growth to limit an expected rise in unemployment and bankruptcies.

South Korean media also said the IMF was calling on Seoul to shut down 12 of 30 of the country’s troubled finance companies, known here as “merchant banks.” Many of them got into trouble by taking on large short-term debts and lending the money out to companies for long-term projects. When they could no longer roll over that borrowing and the companies could not pay them back, they faced insolvency.

Finance ministry officials said over the weekend, however, that this requirement was not included in the package. Talks on this issue may have been one of the key points of negotiation Sunday night.

South Korea is the third Asian recipient of an IMF rescue since the Asian currency crisis began in July. Thailand received a $17.2-billion bailout in August. Indonesia followed in September with a $40-billion bailout package--$23 billion of it from international institutions and $17 billion in credits from bilateral donors, including the United States and Japan.