KOREA

Even more melodramatic and colourful events had been taking place some way North of Indonesia, in Seoul, Korea. At the end of Noverriber 1997, Korea, the 1 1’ largest economy in the world and recently promoted to the OECD, had come within a whisker of defaulting, saved at the 1 1t and three quarterth hour by a combination of the U.S. administration and the IMF. The first days as U.S. Treasury Secretary in December 1994 and January 1995 of Robert Rubin had been a baptism of fire in having to deal with the Mexican currency crisis and its international market ramifications. His already extensive market experience notwithstanding, this period an ideal training ground for the task of leading the decidedly more complex international effort to speed up the loan packages, particularly to Korea and to persuade commercial and investment banks to roll over debt obligations owed to them. On December 24, subsequent to the announcement by the Korean government of a package of reforms designed to restructure the financial system, accelerate and deepen capital account liberalisation, introduce market-based measures to stem the outflow of short-term capital and speed up measures to open the real economy to foreign trade and investment, Rubin made the following statement:
‘We have supported a broad international effort to restore stability in Asia. This effort is critically important to U.S. economic and national security interests. We welcome the steps announced today to the Korean government to strengthen and accelerate its reform programme. These important steps demonstrate the commitment to sustained reform that is essential to a successful programme to restore confidence and return Korea to a path of growth and stability.. The G7 and other nations have announced today their support of action to advance by early January existing commitments of official finance, in the context of a sustained commitment by the Korean authorities to implement an intensified programme and in the context of a significant voluntary extension of the maturities of the existing claims by international bank creditors on Korean financial institutions and adequate progress by Korea towards accessing new sources of private international finance. The United States is prepared to join with the G-7 and other countries in this effort”2
The efforts by the U.S. financial authorities, in the form of the Treasury and the Federal Reserve, along with other Western nations has been crucial in seeking to avoid mass Asian corporate and banking defaults - and, for that matter, a consequent spike in Western bank loan write-offs. Indeed, without these efforts, the IMF loan packages would not have been enough.
rhe model adopted by the IMF for the bailout package of Korea did not quite reflect the subsequent U-turn in its fundamental macroeconomic thinking which was to come, but it did represent an important change, perhaps, in that direction. For the international (i.e. Western) community, it also represented an important change. Up until then, the response from the U.S. and Europe had been sympathetic, but far from unequivocal in terms of concrete support. The U.S. sought to ensure strict terms and conditions for the IMF packages, as fundamental analysis might indeed justify however this was also in full knowledge that U.S. banks had only moderate loan exposure to Asian debtors - the lessons of Mexico 1982 and Mexico 1995 having been well, if painfully learned. The EU, meanwhile, had far greater loan exposure to Asia, European banks having greedily sought to fill the gap left by Japanese banks who quietly started to depart the scene or at least to reduce their exposure in 1996. The option of demanding tough terms was thereby not open to EU officials, not in any case given to demonstrations of resolve against any but the weakest of emerging market countries. On the contrary, they pleaded for softer terms than their U.S. counterparts, fearful that Asian debtors might default, while paying the greater share of IMF contributions, the purpose of which was of course to ensure that default did not occur.
Korea was different in many respects to Thailand and Indonesia, most notably because it had vital geopolitical and strategic interest to the U.S., in addition to its new-found economic status. Put simply, Korea was vital to U.S. national security interests - seen most visibly by the U.S. military presence on the DMZ - and Thailand and Indonesia were not, or not so much. Korea could not be allowed to fail. The bailout was arranged along two lines, the first concerning the IMF negotiations with the Korean government, the second regarding pressure from the Federal Reserve, Bank of England, Bundesbank and others to persuade the international banking community to roll over short-term foreign currency debts, allowing the Korean government the time theoretically to fill the gap through new debt issues.
For Korea, the avoidance of default in December 1997 had been a very close run thing indeed. The New York Fed has summoned senior officials of the 6 largest banks to its Liberty Street headquarters for a meeting on the Korean situation. Korea was experiencing net outflows of over USD1 billion a day and its usual foreign exchange reserves were not much more than USD5 billion. The banks were encouraged to maintain credit lines to Korea on the view that it was in their own interest given that a Korean default would pose systemic risk to the global financial system. The banks’ agreement on this and subsequent agreement by UK and Europe provided Korea with the necessary, though brief breathing space in which to seek options for funding itself, stopping the outflows and boosting reserves.
The devaluation of the Korean won from around 800 to the dollar to a record low of 1985 had meant the amount of won needed to repay dollar debt had more than doubled and given that just under USD30 billion in short-term debt was due by the end of March 1998, this meant potential bankruptcy without outside aid. Korean corporate foreign currency debt from the top 30 chaebol and their numerous affiliates amounted to around USD60 billion. Following the foreign banks’ agreement to maintain credit lines, the Korean parliament in the first week of January passed the government’s proposal to extend some USD20 billion in government guarantees and to issue a total of USD10 billion in new debt. In late January it was announced that the Korean banks and a group of 13 leading international banks had agreed to extend the maturities of almost USD25 billion in short-term debts to the Korean banks, a further major step in the stabilisation of Korea.
On the Korean side, at one and the same time, the Koreans treated the crisis much like any other crisis of their history, as a national struggle for survival, and simultaneously as an opportunity for more hard-bargaining. On the edge of a financial precipice Korea might be, but its new government under President Kim Dae-jung was not without skill or guile in seeking to obtain more favourable terms. Kim was particularly well aware of the country’s need for new international private finance. One of his first acts as President was to invite George Soros, founder and head of the Soros Fund management, for a private meeting. In a press briefing afterwards, Soros reportedly said that he was seeking to increase significantly” the investment of his lead fund, the Quantum Fund, in Korean asset markets, though he first wanted to see significant corporate restructuring - which would inevitably result in painful but necessary heavy layoffs - greater corporate balance sheet transparency through the consolidation of accounts and labour market flexibility.3 ‘Ihat statement worked wonders for improving Kim Dae-jung’s reputation as a free-market reformer, and at the same time potentially attracting the interest of other Western institutional investors to the country. It was a masterstroke. Kim went further, reintroducing the concept of anonymous bank accounts which his predecessor had banned. The initial ban had caused discreet and black money to flee the country, putting pressure on the currency and interest rate markets. In opening up the economy to foreign ownership, while simultaneously promoting Korean national interests, Kim had to walk a tightrope. It was a high-wire act done with consummate skill, but not without compromise. A reformer he was - and is - but he was not about to tear down the structure, the very fabric of Korean corporate or political society. Kim’s other major success was in getting the unions, militant and moderate alike to agree to mass layoffs in return for unemployment pay, a concept inconceivable under previous Korean administrations.
Yet, while he led the reform element in the hope of attracting the necessary foreign capital to keep the economy and the financial system afloat, not all elements within Korea supported his efforts. The ruling party prior to Kim, which now formed a majority in the national Assembly did not appreciate seeing its corporate allies of long year forcibly restructured or rendered bankrupt and sought to frustrate the restucturing process through stalling bills in the parliament. Equally, the chaebol themselves, having gorged for years on cheap credit were hardly keen to go on a forced diet which in many cases involved the forced sale or liquidation of many of their own affiliates and subsidiaries. Many did not fulfil their part of Kim’s compact with the unions by paying unemployment pay, either because they wouldn’t or because they couldn’t meet such obligations. Meanwhile, the economic cost of the fiscal belt tightening which the IME demanded continued to bite into the soft flesh of the aconomy, hurting healthy and insolvent companies alike.