South Korea takes the medicine Reform bills: Sell-offs, layoffs bring loans, extensions from world's banks.

December 30, 1997

SWALLOWING the bitter pills, South Korea's National Assembly yesterday enacted the stringent financial reforms that President-elect Kim Dae Jung opposed before his Dec. 18 election and now concedes to be necessary.

As a result, a single regulatory agency will police banks, brokerages and insurance companies. The ceiling will rise on foreign ownership of firms. The central bank will have swifter power over interest rates. Subsidiaries of a conglomerate will no longer cross-fund each other's expansion. The government will sell bearer bonds to anonymous buyers, hoping to harness the underground economy behind the system.

Passage of the 19-point program freed payments to shore up debt promised in the International Monetary Fund (IMF) $57 billion rescue package. The legislative action was followed by an emergency meeting of banks at the Federal Reserve Bank of New York to discuss possible rollovers and new loans. Similar meetings were held in London and Tokyo.

South Korea's crisis enabled the IMF to dictate reforms diplomacy could not achieve. The country's social contract, protecting privately held firms and workers from failure, is abandoned. The leftist political leader who favors a social safety net agrees to its dismantling. Elected with the help of unions, Mr. Kim is ushering in harsh realities they abhor.

What looms is a fire sale of Korean manufacturers to foreign corporate and financial giants. U.S. and Japanese banks have already bought their way into Thailand in the wake of IMF bailout there. The great fear is social unrest in South Korea from the unprecedented layoffs that are expected. Desire to moderate that blow probably brought a willingness to bail out banks and investors from the consequences of their decisions, which U.S. Treasury Secretary Robert Rubin previously wanted to avoid.

About $15 billion of an estimated $100 billion in private Korean short-term debt is due by New Year's and an equal amount in January. European institutions are owed $33.8 billion, Japanese banks $24.3 billion and U.S. banks $9.4 billion. The Korean banking crisis is a large part of Japan's crisis. There are reasons enough for the international rescue effort to be mounted, to drive as hard a bargain as the IMF did and to be big enough to succeed.

Pub Date: 12/30/97

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