South Korea to Restructure Its Bank Debt

South Korea and its international creditors agreed late Wednesday to restructure $24 billion of South Korean bank debt, a big step toward restoring stability to the nation’s financial system.

The bank debt will be exchanged for South Korean government-backed loans due in one to three years.

“Today’s agreement is a key step toward Korea’s goal of returning shortly to the international capital markets,” said William Rhodes, vice chairman at Citicorp, one of the banks that led the negotiations.

South Korean officials and banks have been holding talks in New York this week to negotiate the debt exchange. The International Monetary Fund promised a record $60 billion to help bail out Korea, which saw its currency, stocks and bonds plunge as its economy slowed and bankruptcies mounted.

The debt exchange is to begin next month and take place by the end of March, according to a statement issued by Citicorp and South Korean officials.

Less than 20% of the new debt will be loans due in one year, Choi Joong Kyung, a finance ministry director said. The two- and three-year loans will have call options that would let South Korea retire the debt before it matures.

The one-year loans will pay interest of 2.25% over the six-month London inter-bank offer rate. South Korea’s two-year loans will pay 2.5% over the London rate, and the three-year loans will pay 2.75% over.

The banks needed to extend the maturity of their loans because the decline in the value of South Korea’s currency, the won, and the amount they owe meant the banks risked default every few months when their loans came due.

“Coming to terms with foreign banks stabilizes Korea’s external financial situation,” Jin Park, who manages $350 million of assets at Strome Susskind, a hedge fund in Santa Monica, said before the agreement was announced.

South Korea had been the 11th-largest economy in the world last fall, before the country used up much of its foreign exchange reserves to defend the won. Investors feared that South Korean banks were saddled with bad loans, and that the economy of the region, which had been considered among the strongest emerging markets in the world, would slow.

The banks that negotiated the plan with South Korea are: BankAmerica Corp., Bank of Nova Scotia, Bank Tokyo-Mitsubishi Ltd., Chase Manhattan Corp., Citicorp, Commerzbank, Deutsche Bank, HSBC Holdings, J.P. Morgan & Co., Sanwa Bank, SBC Warburg Dillon Read Inc., Societe Generale and Westdeutsche Landesbank.

U.S. Treasury and IMF officials weren’t immediately available for comment.

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