Private-Sector Banks Seen Key To South Korea Loan Workout

As banks reached a crucial juncture in debt restructuring talks with South Korea on Wednesday, Treasury Secretary Robert E. Rubin exhorted them to stay focused on the problem.

"What is important now is that private financial institutions move forward on a voluntary basis to negotiate with Korea a longer-term financing plan to help reestablish financial stability," Mr. Rubin said in a speech at Georgetown University. "An approach like this can be an important part of any viable response to similar crises in the future."

He stressed that private-sector banks are vital to solving the financial crisis that has wracked Korea in recent months.

"No amount of official money alone can solve these problems and official money is not the key," Mr. Rubin said. He urged banks to negotiate a long- term financing deal with Korea, which has been relying on temporary assistance from the International Monetary Fund.

Efforts to achieve such a pact proceeded in New York earlier in the day when officials with South Korea's finance ministry met with bankers at Citicorp's headquarters to lay out their position on restructuring.

The centerpiece of the finance ministry's plan is a proposal to syndicate a $5 billion to $6 billion loan, which U.S. banking sources said would be used to bolster Korea's foreign currency reserves. That should help boost the country's credit rating and enable it to borrow at lower costs in the future.

The U.S. banks have been focused on an initiative to swap Korea's short- term loans into long-term bonds totaling between $25 billion and $30 billion. This plan might be more palatable to the finance ministry if it is accompanied by a loan that succeeds in boosting the nation's credit rating from its current junk bond status.

"We don't know how much of this is posturing and how much is serious negotiations," said one banking source. "Their hope is that if their credit rating goes up, they can do a bigger and more economical bond issues."

Richard M. Whiting, general counsel of the Bankers Roundtable, said he expects banks to heed Mr. Rubin's call.

"Banks will step up to the plate here and advance credit and restructure debt in a way that will help those countries and businesses there make it through their difficulties," Mr. Whiting said. "They will do it to protect the investments they already made in those countries."

Peter Allen, managing director at BankBoston Securities Inc., said Mr. Rubin was taking "the right stance for U.S. policy. A situation like Korea does require some reprofiling of the debt. It requires concerted action by the creditors of the country. That is what we did in Latin America."

Mr. Rubin used his speech to defend the Clinton administration's Asia policy. Without U.S. help, he said, the Asia turmoil could infect markets globally.

"If the crisis were to spread more broadly to other emerging markets, then the impact on American workers and businesses could be much greater," Mr. Rubin said. "Simply put, we cannot afford to stand back and gamble that the crisis will resolve itself."

Mr. Rubin said the effects of Asia's troubles on the U.S. economy have been "moderate," but he warned that a recession is possible if the crisis expands.

"The countries of Asia are our customers, our competitors, and our security partners," he said. "Financial instability, economic distress, and depreciating currencies all have direct effects on the pace of our exports, the competitiveness of our companies, the growth of our economy, and ultimately the well-being of American workers."

Mr. Rubin urged lawmakers to support a new emergency fund at the IMF. Failure to invest in the fund would shake confidence in U.S. leadership at a time when the global economy is being rocked by crises.

"The United States needs an IMF that is financially equipped to help protect U.S. interests right now," he said. "If we close the door on the IMF, we hurt ourselves."

Mr. Allen of BankBoston applauded this move, saying the IMF is the only institution capable of entering a country and helping it restructure its economy. "The IMF has to be there to help countries in this type of situation."

Mr. Rubin also announced an initiative by the Treasury Department, Federal Reserve Board, and foreign central banks to develop new mechanisms for handling financial crises. An international meeting set for this spring will look at strengthening oversight of banks in emerging markets, increasing the role of international financial institutions in dealing with global market challenges, and ensuring the private sector bears its share of the burden during crises.

Mr. Rubin disputed assertions that the rescue packages merely protect banks and securities firms from the consequences of risky investments.

"I would not give one nickel to help any creditor or investor," he said. "In fact, vast numbers of investors and creditors have taken large losses in Asia. Foreign banks and other creditors to corporate and other borrowers throughout the region now have many troubled or bad loans."

So far, foreign banks have rolled over upward of 80% of their short term credit lines, according to Fitch IBCA Inc., the international bank rating agency. The agency noted that compares with 20% in the week before Christmas.

In one indication that South Korea's financial situation may already be improving, Fitch IBCA Inc., the credit rating agency, announced Wednesday that it was putting Korea's B-minus long-term foreign currency rating under review for possible upgrade.

Fitch IBCA noted that the change in sentiment reflects "encouraging evidence of a stabilization in the external liquidity position (of South Korea) and a new commitment to economic reform."

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