International Community Backs South Korea Bailout

The international community Friday endorsed South Korea’s reluctant decision to seek a financial bailout from the International Monetary Fund, and the expected deal triggered stock market rallies around the world.

While South Korea faces a painful period of adjustment to meet the tough conditions that are always attached to IMF bailouts, the decision to seek international aid reduces the chances that financial problems here in the world’s 11th-largest economy will cause broader difficulties for the world economy.

“I am confident that the authorities are resolved to put in place a strong adjustment program that will restore confidence, re-create the ground for sustainable growth and contribute significantly to financial stability in the region,” IMF Managing Director Michel Camdessus said in a statement issued in Washington. “I have already assured the Korean authorities of our full support.”

South Korean President Kim Young Sam, in a nationally broadcast television address today, blamed the crisis on structural problems inherited from the country’s past decades of high growth, combined with a new era of global competition.

Kim expressed his “sincere apology” that “the Korean economy, which was the envy of many nations, has become like this.” But he also held out hope that impending reforms could carry long-term benefits for the country.

“We need to restructure our economy,” Kim said. “Depending on how we cope with these problems, this crisis may turn into a blessing. . . . Our macroeconomic indicators are healthy, and we have competitiveness in exports.”

Camdessus estimated South Korea needs $20 billion almost immediately. The size of the total package will be determined over the next several weeks, but analysts generally expect it to be in the range of $60 billion. Some put the figure significantly higher. It seems destined to be the biggest such rescue ever, eclipsing a $50-billion aid package for Mexico in 1995.

The rescue effort will also involve direct assistance to South Korea by other countries, Camdessus said. That is sure to include Japan. White House officials refused comment on whether a separate U.S. aid package would be made available.

“At this point we’re not going to make judgments about any contingent U.S. funds that would be necessary to provide any kind of second line of defense to supplement whatever the IMF might do,” White House spokesman Mike McCurry said.

U.S. support of some kind is considered highly likely, although a bigger financial burden will almost surely be carried by Japan. South Korea is the fifth-largest buyer of U.S. exports and a major holder of U.S. Treasury bills, and the United States has 36,500 troops stationed here.

There are already questions being raised in Congress, however.

“Even if the IMF is designated as the first line of defense, the astronomical bailout figures now in the media clearly suggest U.S. funds could be involved,” said U.S. Rep. Jim Saxton, R-N.J., chairman of Congress’ Joint Economic Committee. “If this is the case, then Congress and the taxpayers have a right to know the terms and any related U.S. financial commitments.”

South Korea’s crisis is largely due to a vicious circle of corporate bankruptcies that led to swelling bad loans at banks, tightening credit, more bankruptcies, the flight of foreign capital, a falling stock market and a plunging currency.

The international stakes are clear. Foreign banks are estimated to have about $200 billion of investments or loans here. The foreign bank branches with the most assets in South Korea include Chase Manhattan Bank, BankAmerica Corp., Citibank and HSBC Holdings.

South Korea has about $20 billion of short-term foreign debt that comes due in December and at least an additional $45 billion that matures in 1998. A key purpose of the IMF bailout is to prevent defaults on this debt, which would cause direct damage to banks around the world and perhaps to the overall global economy.

An IMF negotiating team will arrive here next week to help draw up a package of reform measures to be required as part of the IMF bailout, Camdessus said.

Earlier this month, while still denying the severity of its financial crisis, Seoul had called the idea of an IMF loan “unthinkable.” The decision to accept a bailout came hard.

“Leaving behind our glorious economic development, our country must suffer the humiliation of going bankrupt,” lamented MBC Television in its prime-time evening news.

On Seoul’s stock exchange, reports of the impending IMF rescue pushed the benchmark Kospi index up 17.66 points, or 3.6%, to close Friday at 506.07. The won climbed sharply, strengthening by 7.9% to close at 1,056 to the dollar.

That still leaves the won down about 20% for the year and the stock index down 38%.

Most global stock markets also rose as investors welcomed the government’s negotiations with the IMF. In New York, the Dow Jones industrial average rose 54 points. Asian financial markets in particular posted some big gains; stocks in Hong Kong surged 5%, and Tokyo share prices rose 2.5%. Gains were also seen throughout Europe and Latin America.

Though the IMF is clearly poised to make a deal, South Korea is in the midst of a hard-fought three-way campaign for a Dec. 18 presidential election, and some risk remains that a growing political vacuum could cause Seoul’s talks with the IMF over conditions for the bailout to drag on. Any sign that a deal might be delayed could cause renewed market instability.

The IMF’s sister organization, the World Bank, which joined in the Indonesia bailout, said it did not expect to participate in the package for South Korea because the country’s per capita income is too high to qualify.

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