U.S., Others Will Speed Loan Rescue Plan for S. Korea

WASHINGTON — The world’s major industrial nations, pressed to act faster to alleviate South Korea’s deepening financial crisis, announced Wednesday that they will speed up about $10 billion in already promised loans to help stabilize the country’s financial markets and stem the outflow of dollars.

The move came as the Japanese government also announced new steps to stabilize the ailing Japanese banking system. The actions for both countries raised hopes that the combined impact might be enough to ease Asia’s immediate economic crisis.

But while the measures relieve short-term financial pressures, they do not by themselves solve underlying problems. Those can be rectified only through major economic and political reforms, analysts say.

The emergency Korean package, which includes $2 billion from the International Monetary Fund and $1.7 billion from the United States, was designed to bolster confidence in the world financial markets in hopes of encouraging investors not to pull out of South Korea immediately.

The financial show of force was engineered by the United States and a dozen other rich countries in an attempt to staunch the runs on South Korea’s financial markets that have drained away precious dollars and threatened to cause a wave of corporate bankruptcies that could paralyze the nation’s economy.

South Korean Finance Minister Lim Chang Yuel told reporters today that the country’s cache of foreign currency reserves have shrunk to $8.7 billion, and some analysts had feared that it might disappear if creditors called in their loans at the end of the year.

The new money, scheduled to be disbursed Tuesday and in early January, is contingent upon South Korea’s speeding up reforms to permit foreign firms to buy Korean companies, allowing more layoffs when firms shut down and putting limits on cheap credit--a pledge that the government has already made. These and other reforms are seen as crucial to getting the nation back on a solid financial footing and encouraging needed foreign investment.

Officials said the new disbursements also will be made “in the context of” agreements by large international banks to extend repayment terms on a “significant” portion of the short-term loans they have made to South Korean banks and companies, rather than require repayment when they become due in the coming week.

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Neither Clinton administration officials nor banking industry executives would comment on how probable such rollovers may be. Banking sources, however, said several big banks have already extended repayment terms on their South Korean loans, and most others were expected to do so soon.

A few hours after the IMF and Treasury Department announcements, a group of six large U.S. commercial banks issued a statement welcoming the new rescue efforts by governments and pledging to take part in discussions on how to provide South Korea with more economic leeway.

The multilateral effort--announced on Christmas Eve in Washington after some financial markets in Asia had closed for the Christmas holiday--is risky: If the infusion does not succeed, the rich countries will have poured a lot of money down the drain.

“In our judgment, if these steps are put in place, they should work,” Treasury Secretary Robert E. Rubin told a news conference. “On the other hand, there are no guarantees.”

In Seoul, the Finance Ministry’s Lim welcomed the rescue package and pledged to abide by the terms spelled out by the IMF and the industrial countries. He called the package “a big help” in his country’s efforts to tide itself over the financial crisis.

The agreement to disburse the $1.7 billion in contingency funds marked a reversal for the Clinton administration, which had billed the monies as “a second line of defense” that most likely would not have to be tapped once South Korea began economic reforms.

But Rubin told reporters that the situation in South Korea has been worsening in recent days. He stressed that the country is important to the United States from an economic and a national security viewpoint.

“Now this is something that is well worth doing,” he said of Wednesday’s announcements.

The $1.7 billion from the United States will come from the exchange stabilization fund, a $40-billion pool maintained by the Treasury Department for making short-term loans to countries and for intervening in the foreign-exchange markets.

In all, the United States has pledged about $5 billion to South Korea as part of that fund. Besides the United States, others taking part are Germany, Japan, Britain, France, Italy, Canada, Australia, Belgium, the Netherlands, New Zealand, Sweden and Switzerland.

Both the IMF loans and the money from the industrial nations are part of a $60-billion financial rescue package that authorities arranged earlier this month to bolster South Korea’s economy, which had been weakened by a run on its currency and a drop in stock prices.

The IMF’s share of that larger package is $21 billion. The 181-country organization already has disbursed about $9 billion of that total and had been scheduled to provide South Korea with a third installment of $2 billion Jan. 8.

The IMF said Wednesday that it planned to disburse an “extra” $2 billion installment on Tuesday as well as the $2 billion slated for payment on Jan. 8--a major departure from the organization’s more gradual payout procedure.

Officials said the strategy behind the new rescue effort was to try to stem the outflow of dollars from South Korea in hopes that the financial markets will come to realize that the country, despite balking earlier, is now taking serious steps to overhaul its economy.

Rubin conceded that at least part of the reason the initial rescue package did not calm the markets was that South Korean officials seemed hesitant at first to make needed reforms and made some public statements that investors found disappointing.

Compounding the problem was last week’s presidential election. Kim Dae Jung, the winner, said before the election that he would renegotiate the IMF’s economic restructuring program, only to reverse himself before the election.

Rubin also declined to speculate on how much of South Korea’s $50 billion of short-term debt the banks will be expected to reschedule. He said government officials will meet with the banks soon to review the situation.

There was no immediate reaction from Congress, some of whose members have been critical of the administration’s position in providing rescue money for South Korea. Treasury officials said they had conferred with key congressional leaders and sensed no major opposition.

Disbursement of the $1.7 billion from the exchange stabilization fund does not require formal approval by Congress, which is on recess until late January.

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Rubin also conceded that one key element in the U.S. decision to offer additional help to South Korea was the national security issue. The United States now has 37,000 troops in South Korea, stationed to defend the country against possible attack by North Korea.