South Korea Reshuffles Cabinet in Finance Crisis

A plunging currency and a failure by Parliament to enact a financial reform package triggered shake-ups in South Korea’s leadership today as the lame-duck government scrambled to put together a fresh set of economic bailout steps.

But speculation mounted that South Korea, the world’s 11th-largest economy, would need to turn to the International Monetary Fund for help in stabilizing its currency and put its financial house in order. Any such bailout could rival Mexico’s $50-billion rescue of 1995 as the biggest ever.

The South Korean currency, the won, tumbled by its 2.25% daily limit for a third straight day in early trading. “The government probably won’t be able to sustain more than a week before if turns to the IMF,” said an official at the government-owned Korea Institute of Finance, who asked not to be named. “It’s their only option to get out of this mess.”

Some Korean media reported that Seoul was seeking a direct loan from Japan in the range of $20 billion to $30 billion and that without such a loan it would need to seek an even bigger package from the IMF. Statements in recent weeks by Japanese officials indicate it would be highly unlikely for Japan to make such a loan outside the context of a broader IMF rescue.

The government’s new economic package was expected to focus on the bad loan problems plaguing the nation’s troubled banking system, and at least indirectly help shore up the country’s staggering currency and stock values. It was expected to be announced today, but a new political shuffle delayed action until at least Thursday.

South Korea dismissed Finance Minister Kang Kyong Shik, replacing him with Trade Minister Lim Chang Ryul, a government official said. Lim is a former deputy finance minister. The move was seen as clearing the way for new steps to address the deepening financial crisis.

The government apparently plans to boost government assistance aimed at encouraging mergers that would eliminate some of the weaker financial institutions. It announced a $3.5-billion fund for this purpose in August, and this week’s expected package may boost that figure dramatically.

Problem loans at South Korea’s private financial institutions, including regular banks and finance companies, are estimated at up to $60 billion.

Banks and industrial companies ranging from small firms to large conglomerates are caught in a vicious circle that started gathering momentum last year, with corporate bankruptcies boosting the weight of banks’ bad loans, leading to tighter credit and more bankruptcies. Seven of the country’s biggest conglomerates have suffered financial collapse this year.

But with only a month to go until a Dec. 18 presidential election that will choose a successor to President Kim Young Sam, many analysts are skeptical whether the government can take effective policy measures before a new administration is installed in February.

Trading in the won was virtually paralyzed after the government on Monday abandoned an effort to keep it from weakening past 1,000 to the dollar. The currency fell the legal limit of 2.25% on Monday, and then immediately fell another 2.25% on Tuesday, causing trading to be shut down after just a few seconds. The scenario was repeated today.

On the stock exchange, the benchmark Kospi index closed Tuesday at 494.66, down a modest 2.32 points, or 0.47%. At midday today, the index had tumbled another 2.36% to 483.01.

The government had hoped to clean up the banking system through a 13-bill reform package it wanted to get through Parliament by Tuesday, the last day of its session for this year. But the bills got caught up in disputes over their contents plus maneuvering for the presidential election, and passage was delayed until at least January.

Lee Sang Wook, chief economic policymaker for the main opposition party, the National Congress for New Politics, said additional public debate is needed before Parliament passes the financial reform package. He also indicated openness to the idea of IMF assistance.

But the government has denied any plans for an IMF rescue, which it wishes to avoid partly because of the tough conditions that come attached to such rescue plans.

When Assistant Finance Minister Uhm Rak Yong was asked about a possible IMF bailout as he entered a meeting with U.S. Deputy Treasury Secretary Lawrence Summers in Manila on Tuesday, he replied: “No, no. It’s too premature for that. It is quite premature to have that kind of assistance.”

In Washington, the IMF said Tuesday it was closely monitoring the economic situation in South Korea in cooperation with the government but was not engaged in talks over a possible bailout.

Some private economists and analysts say South Korea should swallow its pride and accept IMF help. The IMF provided large bailout packages in recent months to both Thailand and Indonesia, whose currency-related economic troubles played a role in triggering South Korea’s current problems.

Foreign loans to South Korea that come due in the next 12 months are estimated at about $67 billion, so some kind of backing is necessary to enable those loans to be either rolled over or repaid.

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Chi Jung Nam of The Times’ Seoul bureau contributed to this report.