A $24 billion South Korean debt restructuring deal has dramatically helped stabilize Asia's debt crisis, analysts said Thursday.
But they also warned that the crisis is far from over. Indonesia, Thailand, and Malaysia still suffer from volatile, chaotic market conditions, and banks have billions of dollars at risk in the region.
"It's a positive step," Andrew Gilligan, a banking analyst at Bear, Stearns & Co., said of the Korean deal completed late Wednesday. "But there is still a lot of uncertainty going forward."
South Korea's major creditor banks agreed to exchange $24 billion in short-term, nontrade loans to Korean banks for government-guaranteed loans with maturities of one, two, or three years. The new loans would bear floating interest rates of 2.25%, 2.5%, and 2.75% over the six-month London interbank offered rate.
A term sheet detailing the agreement will be sent to creditor banks worldwide, with the exchange expected to take place by March 31. Under a program already in place, banks have rolled over short-term maturities to Korean financial institutions through March 31.
South Korea owes foreign lenders an estimated $156 billion. The creditor agreement covers only loans to Korean banks and does not include corporate borrowings. It replaced an earlier suggestion under which South Korea would have swapped short-term borrowings for longer-term bonds. South Korea balked at the earlier proposal after it became clear that it would have locked the country into paying exceedingly high interest rates.
Banks that have so far agreed to support the latest proposal include BankAmerica Corp., Chase Manhattan Corp., Citicorp, J.P. Morgan & Co., Bank of Nova Scotia, Bank of Tokyo-Mitsubishi, Commerzbank, Deutsche Bank, HSBC Holdings, Sanwa Bank, SBC Warburg Dillon Read, Societe Generale, and Westdeutsche Landesbank.
William R. Rhodes, executive vice chairman of Citicorp and a key figure in the debt negotiations, said he expected the agreement would pave the way for South Korea to return to borrowing on international debt markets. The country has been effectively cut off from those sources since it ran into a severe liquidity crisis at the end of last year.
"Today's agreement is a key step toward Korea's goal of returning shortly to the international capital markets," Mr. Rhodes said in a statement Wednesday.
"The agreement is realistic and very good for both sides," he added in a statement released Thursday in Zurich.
In a similar vein, the head of South Korea's negotiating team, deputy finance minister Duck-Koo Chung, said the plan would provide a "stable source of funding to the Korean banks on commercial, market terms" and would help "restore stability to the Korean banking sector."
But even as the worst of South Korea's financial crisis appeared to be passing, analysts warned that banks are not out of the woods.
As in the Third World debt crisis of the 1980s, "U.S. banks once again face the uncertainties about ultimate repayment on debts to Korean and other Asian country corporates," said a recent Standard & Poor's Corp. assessment.
"Over the next year, these uncertainties will likely lead to rising levels of nonperforming loans for those banks with significant exposure and will serve to divert management attention," S&P concluded.
Raphael Soifer, a banking analyst with Brown Brothers Harriman & Co., said, "There are two issues in Asia: One is containment, the other is potential losses."
Much of U.S. banks' $21 billion of exposure to South Korea, he noted, is in the form of derivatives contracts and other off-balance-sheet items. Even if loans eventually do get repaid, it remains to be seen how other types of exposure hold up.
According to a recent Bear Stearns survey, BankAmerica has $684 million in cross-border exposure to Indonesia, $2.8 billion to South Korea, and $881 million to Thailand.
Bankers Trust New York Corp. has $1.7 billion to South Korea, $1.2 billion to Indonesia, and $600 million to Thailand.
Chase Manhattan has $5.4 billion outstanding to South Korea, $2.5 billion to Indonesia, and $1.9 billion to Thailand. Citicorp has $2.4 billion to Korea, $500 million to Indonesia, and $200 million to Thailand.
J.P. Morgan has $3.4 billion in cross-border outstandings to South Korea, $1.1 billion to Thailand, and $900 million to Indonesia.
Banking sources said Indonesia represents the most intractable unsolved problem in the region.
"Overall exposure to Indonesia is still small, but if you've got a dollar-denominated loan to an Indonesian corporate, you've got a problem," Mr. Soifer said.
A banking source said a Korean-style deal wouldn't work for Indonesia, which "faces a crisis of confidence compounded by capital flight and political confusion. What they really need is a plan to introduce sound financial practices."