The prospect of an imminent bailout of the stricken South Korean economy by the International Monetary Fund helped to stabilise the financial crisis in Asia yesterday, with gains in most of the region's battered stock and money markets. Finance Minister, Mr Lim Changyuel last night announced that Seoul had asked the IMF to provide standby credits to overcome "difficulties" in the financial and foreign exchange markets.
"We accepted the advice from the IMF and our friendly nations and we decided to ask for the IMF loans," he said. "The size of the loans will be discussed. But the IMF and ourselves agreed that $20 billion (£13.4 billion) would be enough to solve the difficulties." International Monetary Fund managing director, Mr Michel Camdessus said yesterday he welcomed South Korea's request for financial help and said the country was committed to restoring confidence in its economy. "I am confident that the authorities are resolved to put in place a strong adjustment program that will restore confidence, recreate the ground for sustainable growth and contribute significantly to financial stability in the region," he said in a statement.
Mr Camdessus said an IMF mission would start talks in South Korea next week, helping the authorities draw up a strong program of reforms. He said measures announced earlier this week would provide a good basis to restructure the South Korean financial system.
The low level of the proposed bailout surprised observers and financial analysts. Local media had speculated South Korea would need between $50 billion and $60 billion to prevent a bank collapse and analysts in Japan put the figure at $100 billion. The South Korean economy is burdened with some $70 billion in short-term debt, most owed to foreign lenders, who are reluctant to roll it over. Earlier, Mr Lim held talks with IMF deputy secretary general, Mr Stanley Fischer in Seoul, after which he said a decision to ask for leans would be made in three days.
He said last night an IMF team would arrive next week to discuss the details of the stand-by credit. "I think we can get the loans three or four weeks after we reach the agreement," he added.
Korean president, Mr Kim Young Sam will address the nation today on the financial crisis and also meet political party leaders to ask for their co-operation in getting South Korea out of its deepest economic crisis for years. South Korea, the 11th biggest world economy and one of Asia's successful tiger economies, is the latest victim of the Asian devaluation contagion. Holding out a cap to the IMF is a blow to South Korean pride, especially as last December it was admitted to the exclusive club of developed nations, the Organisation of Economic Co-operation and Development (OECD), countries which give, rather than receive aid.
The IMF bailout for South Korea is the third in Asia since the crisis began in Thailand in late summer. The IMF provided $3.9 billion credit for Thailand in August and put together a package for Indonesia on October 31st providing for as much as $40 billion in aid, although the front-line defence is $23 billion.
The IMF intervention in South Korea became inevitable after the acceleration of a year-long slide of the value of the won. In January it stood at 842 to the US dollar. By August it had fallen to 901, an alltime low. On November 1st a Korean central bank official said the won would "never, never, never" breach the psychologically important 1,000 barrier.
"Never, never, never" arrived on November 17th when the central bank announced it would no longer defend the won. It immediately fell to 1008.60.
Part of the price paid by Indonesia for its IMF deal was the liquidation of 16 unhealthy banks. The reforms to come in South Korea would also be painful, with dozens of weak businesses going into bankruptcy, analysts said.
"The IMF loan is not a bailout loan. It's a standby credit," Mr Lim said. "It is backing up the liquidity shortage. An IMF loan has the advantage of stabilising the market quickly. So, if necessary, we can co-operate with the IMF." South Korea's currency and stocks soared yesterday as the government entered negotiations with the IMF.
The won closed at 1065.0 to the dollar, up sharply from Thursday's close of 1139.0, at the prospect of an easing of the dollar shortage. The stock market ended up 3.6 points.
