S. Korean leaders pledge support of IMF bailout Candidates forced to bow to growing power of financial markets

December 14, 1997|By NEW YORK TIMES NEWS SERVICE

SEOUL, South Korea -- With South Korea careening toward a possible default on its foreign debt, the three leading presidential candidates abruptly took the economic risks more seriously yesterday and signed a pledge promising to put into effect a bailout agreement with the International Monetary Fund.

Yesterday's agreement may modestly help to raise the confidence of foreign investors and bankers, stabilizing the financial markets and reducing the risk of default. But there are still widespread doubts about whether South Korea is ready to accept the pain of a major financial restructuring.

In a semiofficial confirmation of the risks, the president of the governing party warned yesterday that South Korea may be forced to default. Cho Soon, who also was a respected economics professor and head of the Central Bank, told foreign reporters that default is inevitable if foreign banks insist on being repaid and refuse to roll over loans when they become due.

Default taken seriously

"If foreign lenders refuse to lend money to Korea, then we have no choice but to default," Cho said. "In that case, we will have to move to debt rescheduling, and that conclusion will cause havoc -- havoc not only to Korea but to Asia as a whole, and to some extent, to the rest of the world."

"How close is Korea to the possibility of default?" he said. "I really do not know."

However, Cho twice approvingly quoted a newspaper report that the risk is 50-50.

A default in Korea's case presumably would not mean that the government would fail to honor the nation's sovereign debt, but rather that some of the nation's banks and corporations would be unable to pay back loans when they become due.

Companies in South Korea and other countries sometimes default, but it would be far more serious if the nation's banks could not pay back their loans.

The banks have close ties to the government in South Korea, and a default by them would seriously harm the nation's reputation and complicate the prospects for a recovery.

Candidates under pressure

It was with the risk of a default in the backdrop that President Kim Young Sam summoned the three leading presidential candidates to Blue House, his mansion, for a meeting yesterday morning. Kim effectively forced the candidates to sign an agreement pledging support for the $57 million bailout the IMF approved earlier this month.

"By observing the agreement with the IMF, we will enhance the nation's international credit standings," the statement said. It also called for Koreans to unite in overcoming the hardships.

The joint statement was a remarkable example of the growing power of financial markets, effectively forcing the presidential candidates to change their policies in a domestic presidential campaign.

All three candidates had previously signed a similar pledge, but then two -- Kim Dae Jung and Rhee In Je -- ignored it and called for renegotiating the IMF accord. They apparently hoped to tap widespread resentment in South Korea at the tough conditions that the IMF insists Korea must follow in exchange for the bailout.

Adhering to the conditions will mean closing insolvent financial institutions and companies, putting people out of work, and slowing growth in a nation that has become accustomed to perpetual boom.

Kim Dae Jung particularly worried bankers and investors, because he is the leading candidate in the polls. He repeatedly called for renegotiation and took out newspaper advertisements opposing the IMF accord.

That helped send Korea's currency and stocks tumbling further. The drop also made it more difficult for South Korean companies and banks to make payments on their dollar-denominated foreign debt, and the uncertainties made foreign banks less likely to roll over the loans.

Political alarm

The result may be that Kim's calls for renegotiation backfired politically. While popular at first, they later alarmed people who saw how the markets fell and how their savings eroded further.

Kim now says that he never meant to repudiate the IMF agreement, but simply that he planned to use the occasion of periodic reviews to call for modifications within IMF guidelines.

In a sign of how the popular mood may be shifting, the other candidate -- Lee Hoi Chang, a former judge who is running slightly behind Kim -- has begun criticizing Kim for undermining the nation's economy with his calls for renegotiation.

Lee purchased newspaper advertisements yesterday reminding voters of Kim's statements and their effect on the financial markets.

Pub Date: 12/14/97

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