U.S. Banks Offer Choices on S. Korea Restructuring

A number of U.S. commercial banks on Friday thrashed out a menu of choices for international creditors in a continuing effort to solve the South Korean debt crisis, banking and investment sources said.

“They are trying to mobilize some strong backup plans,” a banking source told Reuters, adding that the options would be designed to appeal to Asian and European banks that hold the bulk of South Korean private-sector debt.

Non-U.S. banks, under different regulatory regimes and accounting rules, do not always share the same approach to rolling over bad loans, he said.

For example, Japanese and European banks were more inclined to write off nonperforming Latin American debt in the 1980s, while U.S. banks were reluctant to do so as long as the borrowers continued paying interest on the loans, he said.

A group of U.S. commercial banks gathered at Chase Manhattan Bank headquarters in New York on Friday after a meeting earlier this week produced an agreement to roll over South Korea’s maturing short-term obligations and to restructure them eventually in longer-maturity debt.

In a related development in Seoul on Friday, South Korea said it will complete the takeover of its two most indebted commercial banks next month and then sell them to foreign investors.

Korea First Bank and Seoul Bank were left with $2.67 billion and $2.14 billion, respectively, in bad loans when a series of South Korean conglomerates collapsed last year, triggering a financial crisis.

News reports in South Korea said certain U.S. banks are interested in taking over the ailing banks by themselves or through joint ventures with South Korean conglomerates.

The announcement reflects South Korea’s efforts to boost international confidence by restructuring its financial sector and opening it to foreign investment in return for the record $57-billion International Monetary Fund bailout.

Analysts in New York said some U.S. creditors were resisting a J.P. Morgan & Co. proposal to convert part of the short-term South Korean bank debt into government bonds.

Unlike sovereign loans, private-sector loans are more difficult to homogenize into one restructured debt, they said.

A foreign lender to state-run banks in South Korea, such as the Korean Development Bank, would not want to “denigrate the assets” by lumping them with the liabilities of lesser banks, said an analyst.

But overall, banking and investment sources said the agreements laid a foundation for South Korean debt restructuring. They said the risk of default has been greatly diminished.