S. Korean IMF trap a lesson for us



Malaysians should quickly learn from the agonising experience of South Korea. This once rich but now indebted nation has been humiliatingly forced into a corner by near debt default. Last week, South Korea had to agree to fully open its economy to foreign investors who are now preparing to pick up Korean assets at dirt-cheap prices. It also agreed that the government would guarantee the foreign debts of Korean banks, thus paving the way for massive subsidies to the foreign creditors.

AS we enter the New Year, spare a thought for South Korea. And hopefully we can learn a few good lessons from it.

We must, in fact, learn these lessons well, so that we can make a firmer resolution to avoid the kind of tragic fate that has befallen the Koreans.

As Christmas approached, that country, once so proud to be the 11th biggest economy in the world, was in desperate straits.

Having contracted about US$100bil in short-term foreign loans (most of it belonging to the private sector), it needed foreign exchange worth US$10bil to pay the foreign debts of its local banks and companies that were due before the end of 1997.

It also required another US$10bil for loans coming due in January 1998.

South Korea had only a couple of billion dollars in reserves, as the bulk of the US$55bil new loans pledged to it under the IMF programme is scheduled to be disbursed in several installments over the new year.

So the South Korean government went around, to the US, to Japan and the IMF, pleading that the funds already agreed to be released more quickly.

Otherwise some of the debts would be in default shortly after Christmas.

At first the rich countries and the IMF said "No".

They were not happy with what they called the Korean government's lack of seriousness in implementing the economic reforms that they had formulated in exchange for the rescue package, announced on Dec 3.

Then a breakthrough came when the new president-elect, Kim Dae-Jung, changed his tune from criticising the IMF conditions (during the campaign) to fully embracing it (after his election).

He and his team met with US Treasury Undersecretary David Lipton and IMF officials and assured them of his full co-operation.

Kim Dae Jung's team, the US, Japan and the IMF, together with present Korean government officials, negotiated through the day and then in the early hours of Christmas and the Finance Minister announced a breakthrough had been achieved.

Next day, it was confirmed in Washington that the IMF and 13 governments (including US and Japan) had agreed that US$10bil from the US$55bil package would be released earlier, before the year's end.

In the next few days, many of the foreign banks that had lent to South Korea also held meetings (in New York, Tokyo, Bonn, London) and agreed that they would "roll over" loans that were coming due for just one more month.

During the month, they would assess whether South Korea could come up with a good enough plan, and then decide on further action.

Thus, South Korea was saved from having to declare a "debt default."

A victory, it seems, or at least good news. But reading the finer print of this whole episode, one gets more and more disturbed.

For the victory belongs not to the Koreans after all, but to the major rich countries and to the foreign banks.

First of all, Korea has not been let off the hook. It has only won a reprieve of a month, at most.

The US$10bil is not new or additional loans, but merely an early disbursement of a part of what had already been pledged.

Neither are the international banks offering relief of some of the debt stock, or accepting they have to bear some of the loss.

They are only postponing, for a month, the payment of loans (probably with extra interest for delayed payment) that were due and which they were in any case unable to collect.

And this earlier disbursement and the rollover were not obtained cheaply by Korea.

From the scraps of information pieced by the media (for the deal between Korea, the IMF, the rich nations and the banks remains a secret), it is clear that under the intense pressure of being on the brink of "default", the South Koreans had to give in to demands that were additional and much more onerous than the ones they had already agreed to in the original Dec 3 agreement.

It would appear that the Koreans were forced into a corner with their backs to the wall, and then in a situation of extreme weakness, they had to give in to conditions that would cripple their own banks and companies, but would open the door for foreign banks and companies to enjoy an undreamt of bonanza.

Two of the most significant new demands are that:

South Korea must now open its economy fully to foreign firms, allowing them to own up to 100% of listed Korean companies; and

The South Korean Central Bank will guarantee or take over the foreign debts of local Korean banks, thus enabling the foreign banks to recover in full their ill-conceived loans to the Korean banks.

The first condition spells the full "surrender" of Korea to the rich countries' pressure to enable their corporations to take over Korean banks and firms at very cheap prices, since most of these local institutions are in trouble and their share values have fallen to very low levels.

Before the IMF deal, the shareholding limit for foreign individuals was 7% in a specific Korean company stock, while the combined foreign shareholding limit was 26% in a stock.

The IMF's Dec 3 deal raised the foreign ownership ceiling on a combined or individual basis to 50% by mid-December 1997 and 55% by December 1998, thus enabling foreign firms to own a majority (though not total) share in Korean companies.

Apparently this was not good enough for the foreign firms.

Their governments took advantage of the brink-of-default situation to extract an even greater concession, accelerating the timetable so that now foreign investors can own up to 55% of shares in any listed Korean companies by 31 December 1997 and 100% by December 1998.

South Korea also agreed to abolish nearly all restrictions on foreign investments in its financial markets and banking sector.

Foreign banks and brokerage houses can establish full operations from March 1998.

Also, the bond market will be fully opened to foreign participation by the end of 1998.

South Korea is also required to repeal its interest rate ceiling of 40% in two months, decide how to treat insolvent financial institutions within five months, reform labour laws and permit sacking of workers in corporate takeovers.

According to the Financial Times (Dec 27-28, 1997): "The full opening of the capital markets will pave the way for foreign takeovers of Korean companies . . ."

Since many Korean firms and financial institutions are on the brink of bankruptcy, the policy changes are meant to provide a golden opportunity for the foreign investors to go through the debris of corporate Korea and pick up valuable assets at basement bargain prices.

The tremendous resentment this new deal will generate among Koreans has been recognised by the Financial Times, whose editorial on Dec 29 had this to say: "This money (the US$10bil advance) is no present.

The principal purpose of the rescue is to stabilise global financial markets, halt financial contagion and save foreign creditors.

"The policies being demanded in return will accelerate the slide into bankruptcy of the over-indebted Korean private sector.

"This will make it even easier for foreign investors to buy domestic assets at undervalued prices. Korea Inc. is now going for a song.

"Ordinary Koreans are entitled to feel cynical. They are no less entitled to anger when people write of their economy as if it were a basket case.

"How many economies have generated full employment, a relatively equitable distribution of income and a more than 17-fold increase in real incomes per head over the past half century?"

The second major deal is the reported agreement of South Korea to promise to guarantee the foreign debts of Korean commercial banks.

According to the Wall Street Journal, the Central Bank guarantees are on offer for any banks that agree to convert short-term loans into long-term financing of one to two years.

According to the report, these guarantees were the key factor in the Japanese banks' decision to roll over their loans to Korean institutions.

However, the guarantee offer is still being discussed.

Some Korean officials are reportedly against transferring private debt to the government.

During the next month, when the foreign banks will decide whether to further roll over their loans, we can expect great pressures to be put on the South Korean government to formally guarantee Korean banks' foreign debts.

It should not be a surprise if they add a new dimension: that private corporations' debts be also taken over by the government.

According to the Finance Ministry, on Dec 20 South Korea's external debts totalled US$153bil, including US$99bil borrowed by financial institutions, US$43bil by corporations and US$11bil by the public sector.

Should the guarantees proceed, then the government may have to assume up to US$99bil to US$142bil of private sector debts (depending whether corporations' debts are also eventually included).

If such guarantees are given, then Korea will be caught between two pincers.

On one hand, South Korea's local banks and corporations would be in deep trouble: the IMF and the rich nations can go ahead with their demand that the government must not come to the aid of ailing institutions because they are now assured that the foreign debts of these institutions will be repaid to the foreign banks by the government.

On the other hand, the South Korean taxpayers will have to subsidise the foreign banks who are paid in full (although they took the commercial risk of lending) whilst South Korean shareholders, depositors and retrenched workers are forced to bear the full brunt of adjustment.

Foreign investors can then swoop down and pick up the crippled local banks and companies, whose foreign loans are already resolved by the government, and take control of the South Korean economy.

As even the Financial Times recognises, South Korean citizens are entitled to feel cynical and angry at this turn of events.

Even non-Koreans might feel their blood boil at the vulture-like behaviour of the rich countries and their opportunistic investors who contributed to the crisis in the first place (through their inflow and outflow of funds) and who are now taking advantage of Korea's agony to extract from the sick patient its last ounce of blood.

What has happened to South Korea may also happen to Indonesia and Thailand, the other two recipients of IMF-sponsored "foreign aid", if their luck continues to run out this year.

And the lesson for us? Try our very best to avoid getting into a Korea-like situation.

Strive to the utmost to solve our present serious problems by ourselves, without having to resort to "foreign aid" under the IMF and the rich countries.

For their aid is really designed to help the foreign companies gain instant access, at cheapest rates, to our developing-country markets and our local companies. And to help the foreign banks to get their money back, through getting the government to take over private debts.

The collective 1998 resolution for Malaysians is therefore for all to do their part to strengthen the local economy and improve the balance of payments, by buying, saving and investing locally.
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