S. Korea Scrambles to Avoid Bailout as IMF, U.S. Set to Meet

South Korea’s new finance minister maneuvered desperately Thursday to avoid a humiliating bailout by the International Monetary Fund, proposing instead a cooperative deal among foreign central banks--especially Japan’s--to moderate his country’s fiscal crisis.

But even as he spoke, top IMF and U.S. Treasury officials descended on Seoul for discussions that observers said could lead to an IMF-centered rescue package as early as next week.

The financial crisis here is rooted in a vicious cycle of corporate bankruptcies and rising bad loans at shaky financial institutions; a loss of foreign investors’ confidence; capital flight; a plunging currency; and falling stock prices. South Korea is the world’s 11th-largest economy, so if its troubles worsen, the impact could hit neighboring Japan especially hard.

IMF bailouts always come with tough conditions, and South Korea has been hoping to avoid such a rescue by taking reform measures on its own and by winning direct bilateral assistance from Japan and other countries. Both Tokyo and Washington, however, have repeatedly stressed that any bailout will come only in the context of an IMF package.

Finance Minister Lim Chang Ryul, speaking at a Thursday news conference, insisted that the stance taken by Tokyo and Washington still does not rule out the possibility of direct bilateral aid. He implied this might involve intervention in currency markets by the region’s central banks, plus Bank of Japan’s backing for short-term loans to South Korea.

“It isn’t necessary at this point to seek direct help from the IMF,” Lim said. “The Japanese and Korean central banks can make some arrangement. G-6 is one example.”

The Group of Six is a low-profile grouping of Japan, China, Hong Kong, Singapore, Australia and the United States that grew partly out of efforts begun in 1995 to stem the Japanese yen’s sharp appreciation against the dollar. The group, which focuses on Pacific Rim economic and trade issues, held its inaugural meeting in Tokyo in March.

Lim noted that Japan had used this approach to address its own economic problems, and added: “I believe the Korean government could also pursue a similar system.”

Time may be running out for such measures, however.

Lim said Thursday, in the first such public admission from a South Korean finance official, that “Japanese financial institutions are calling back loans instead of rolling them over.”

South Korea is asking Japanese banks to renew those loans, he said, and the central banks of South Korea and Japan also could set up a “backup system” in case Japanese banks refuse to roll them over.

“Japanese help is vital,” Lim said.

South Korea has about $67 billion of foreign debt due in the next 12 months, including about $20 billion that matures in December. Much of that is owed to Japanese banks.

Before the current crisis erupted, with foreign investors losing faith in the South Korean currency and the country’s economic stability, nearly all of that debt would have been routinely rolled over into new loans. The need to avoid defaults on this foreign debt lies at the core of the immediate crisis facing Seoul.

Arriving in Seoul Thursday to discuss these issues were Timothy F. Geithner, the U.S. assistant treasury secretary for international affairs; Ted Truman, staff director of the U.S. Federal Reserve’s international finance division; and IMF Deputy Managing Director Stanley Fischer.

Little information was immediately available about their meetings, however. Fischer said he was not engaged in “official” discussions, even though he was seeing government officials as well as private-sector experts.