South Korean talks resume as bailout unravels Strong medicine being resisted, but an accord is expected

Pacific Rim


SEOUL, South Korea -- An apparent agreement for a rescue of the South Korean government unraveled yesterday and negotiations began again, as Seoul resisted taking severe steps, such as the closing of insolvent banks, that were advocated by the International Monetary Fund.

By this morning, some government officials were saying a new agreement had been reached and a Cabinet meeting was called to endorse the plan. All three major networks were reporting that South Korea had partly capitulated, agreeing to close more than half of the 12 nearly insolvent merchant banks.

But at a Cabinet meeting, Lim Chang-yuel, the minister of finance and economy, said there were still outstanding issues to be resolved and he did not even present the plan to the Cabinet, which adjourned after 10 minutes, according to a spokesman for President Kim Young-sam.

Some agreement is still expected this week. But the disarray suggests the difficulty in biting the bullet by a nation that is now the world's 11th largest economy and has known little but breakneck growth for three decades.

South Korea's stock market and the value of its currency plummeted further this morning, after both had fallen sharply yesterday. The falls could indicate that the conditions set by the IMF would provoke a sharp economic slowdown.

The Korea Stock Exchange's composite index plunged 14.70 points yesterday, or 3.6 percent, to 393.16, its seventh consecutive decline and the first time that it has closed below the 400 level in more than 10 years. The currency, the won, settled at 1,187 to the dollar, a record-closing low.

Korean press reports said the big obstacle in the negotiations was the IMF's request that South Korea liquidate troubled merchant and commercial banks.

Seoul, worried about increasing unemployment and a possible run on banks, has favored allowing these institutions to be revamped or merged with healthier companies. About 12 of the nation's 30 merchant banks and three or so commercial banks are considered candidates for closing.

The two sides were also said to disagree over the target for economic growth next year, though the final figure is likely to be about half of this year's expected growth rate of 6 percent.

While the terms of any bailout have not been announced, press reports here have said about $55 billion may be made available to South Korea by the IMF. That would make the rescue the largest ever, surpassing the $48 billion allocated for Mexico in 1995 after its currency crisis.

Lim, the finance minister, had proclaimed early yesterday that an agreement had been reached, and late in the afternoon reporters gathered for a news conference intended to disclose details. But Lim never came, heading back instead to more negotiations with the IMF. It appeared that Lim might have initially overstated the extent of progress in the negotiations, since IMF officials had said all along that there was no agreement. It is also possible that Lim encountered opposition to the proposed terms within the South Korean government.

The IMF bailout is intended to reassure international financial markets that Seoul will be able to pay its foreign debts.

"In the short term, it will help gain back international confidence in the Korean economy," said Sakong Il, a former finance minister who is now chairman of the Institute for Global Economics, a research organization. "It will stabilize the foreign exchange market."

But the prospect of the bailout did not stabilize the currency market or the stock market. And, in an indication of interest rate trends, yields on three-year corporate bonds rose today to 18 percent, compared with about 15 percent Friday.

"We are all prepared for quite serious recession now," said Park Ungsuh, president of the Samsung Economic Research Institute, part of the nation's largest industrial conglomerate.

Pub Date: 12/02/97

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