World's banks bend to help One-month reprieve given on troubled loans of $15 billion

South Korea


The world's most influential commercial and investment banks -- working with the regulators that oversee them -- gave South Korea a one-month reprieve yesterday on up to $15 billion of troubled loans due by year's end to help strengthen the country's precarious financial position.

The agreement, which essentially bent the rules for large borrowers near default, was the only realistic alternative for these banks. They would have faced the prospect of losing much more and perhaps causing a far greater crisis by demanding repayment.

Their decision followed moves by the International Monetary Fund and other lending institutions last week to provide $10 billion in accelerated aid to the beleaguered country.

Although South Korea is the 11th-largest economy in the world and is considered a bulwark against security threats posed by North Korea, more than the fate of that one country is at stake.

Japan's economy is ailing, and all lenders, particularly the Japanese themselves, are looking past South Korea and assessing the disastrous impact corporate defaults there eventually might have on Japan -- South Korea's single largest creditor and the world's second-largest economy.

The latest rescue efforts were aided by South Korean legislators' decision yesterday to pass major financial reforms pushed by the IMF. The reforms included deregulating interest rates, opening the country's markets to foreign investors, and, effective two years from now, forbidding subsidiaries of the country's giant conglomerates to fund one another's activities. South Korea also consolidated financial supervision under the auspices of one regulator, a move designed to appease critics of a lax regulatory system.

To allay concerns among South Koreans that the economic crisis would result in massive layoffs, the legislature declined to pass a law that would have made it easier for banks there to dismiss workers. That could be a sticking point between South Korea and the IMF, which had sought such a change.

In the United States, about a dozen American commercial and investment banks met yesterday morning with Federal Reserve officials in New York, then reconvened with international counterparts later in the afternoon at the headquarters of J. P. Morgan & Co. J. P. Morgan is one of the largest U.S. banks and is coordinating the response of international financial services firms to the South Korean crisis.

The banks have agreed to roll over $10 billion to $15 billion in loans and other financial contracts until the end of January.

After that, the troubled debt will be repackaged as bonds, guaranteed by the South Korean government, that commercial and investment banks will purchase and either hold or resell, according to U.S. commercial bankers with knowledge of the talks.

"From what we understand, this process is proceeding in a constructive way," said Lawrence Summers, the deputy treasury secretary. "Going forward, there will be a great deal of work to do."

Pub Date: 12/30/97

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