The International Monetary Fund has confirmed that it has arranged its biggest ever aid package, totalling $55 billion (£37 billion), for debt-ridden South Korea. Details of the rescue plan for the world's 11th-largest economy will be made known today after IMF managing director Michel Camdessus submits it to his board for approval.
The successful completion of week-long negotiations between IMF and Korean officials is likely to steady Asian stock markets and currencies, which fell in Thailand and Indonesia yesterday on uncertainty about the outcome of the negotiations in Seoul.
For South Korea, the fastest growing of the Asian tiger economies, the IMF rescue is a national humiliation. Seoul will now have to reduce the rate of economic growth, shut down failing banks, cut public spending and possibly raise taxes.
Finance Minister Lim Changyuel expressed shame in a statement to the nation, saying "I stand here, deeply apologetic to the people, as I am the deputy prime minister in charge of the overall economic policy." The rescue would be painful, he warned. "But these pains and burdens are the cost our economy has inevitably to pay to revive and to recover our lowered credibility in the world financial society."
South Korea becomes the third Asian country to be bailed out by the IMF this year, following Thailand and Indonesia, as a round of currency devaluations left banks unable to pay debts taken out in dollars. The Korean Finance Ministry is likely to suspend operations at nine of the country's 32 merchant banks, which have been blamed for starting the crisis through reckless lending practices. Some $35 billion of the aid, which is $5 billion higher than the IMF Mexico bailout in 1995, will begin to flow into South Korea tomorrow. Seoul needs assistance urgently to pay short-term debt. The central Bank of Korea was forced to pay $10 billion in short-term foreign debt on behalf of Korean banks over the last few days.
Another $20 billion is said to be due at the end of this year. The IMF will provide $21 billion in standby credits, Mr Camdessus told reporters. The World Bank will provide another $10 billion and the Asian Development Bank $4 billion. Japan will contribute $10 billion and the US $5 billion, with another $5 billion coming from Britain, Germany, France, Canada and Australia.
These payments would depend on South Korea remaining in compliance with the Fund arrangement," Mr Camdessus said. The package "provides for a decisive and welcome response to the country facing difficulties."
The programme comprises strengthened fiscal and monetary policies, far-reaching financial reforms and further liberalisation of trade and capital flows as well as improvement in the structure and governance of Korean corporations.
US Treasury Secretary Robert Rubin welcomed the success of the negotiations, saying the United States had a vital national economic and security interest in helping Seoul restore financial market stability as soon as possible. He said US aid would be made available on a temporary basis and was conditional on Seoul implementing an appropriate set of macro economic and structural policies.
The South Korean crisis was preceded by a string of major corporate failures in 1997. The finance minister Kang Kyong-Shik resigned after the won sank below the 1,000 to the dollar mark.
On November 25th, Korea requested some $20 billion in loans from the IMF. On December 1st, Seoul officials announced an IMF package of some $55 billion but the IMF said it had not agreed. Mr Camdessus arrived in Seoul on December 2nd to join the talks.
