South Korea said Wednesday that it would ask the United States and Japan to help rescue the country from potentially the most damaging outbreak yet of a financial crisis that has erupted across Asia.
But American officials, while encouraging South Korea to seek assistance, made clear that the International Monetary Fund, not Washington, would have to take the lead in any bailout of South Korea, the world's 11th largest economy.The country's urgent need for billions of dollars to meet its commitments to overseas lenders and to end a sell-off of its currency prompted a hurried series of back-channel consultations by American, European and Japanese officials hoping to prevent Korea's problems from infecting other markets around the world.
Their immediate concern was how to persuade Korea's leaders that the country could no longer forestall a bailout by the IMF until after presidential elections next month. In the midst of a turbulent campaign in which the ruling party may lose power, Korean politicians are trying hard to avoid the embarrassment of surrendering economic policy for the country to an outside authority.
Wednesday afternoon, Treasury Secretary Robert Rubin issued a statement urging Korea to "move forward quickly to address the present challenges, in particular with forceful and effective action to strengthen the financial system."
To underscore the need for quick action, two senior U.S. officials were dispatched to Seoul on Wednesday to meet with the country's new finance minister, Lim Chang Yuel, who took office Wednesday after his predecessor was dismissed by President Kim Young Sam.
Within hours of his appointment, Lim said he would seek help from the central banks of the United States and Japan, though he did not specify what he had in mind, and no formal request has yet been made.
Presumably, what Korea would ask for is a complex transaction between central banks, known as "swaps," in which dollars or yen would be temporarily exchanged for Korean won. Lim also reversed the government's previous insistence that it would not accept rescue plans, as did Thailand and Indonesia earlier this year, saying he would "consider an IMF bailout if necessary."
Both outside economists and American officials say that the underlying industrial capability of South Korea remains strong; it is a big manufacturer of steel, automobiles and semiconductors.
But the country's growth can no longer provide the cash to cover the debts of a banking system that is now in shambles after loaning money to wildly overinflated real estate projects, pork-barrel construction and well-connected businesses that, in return, paid the ruling party handsomely. Bad loans now total more than $20 billion, Korean officials say, and many economists believe that the real figure is much higher.
No one seems to know how big a bailout fund might be required. Internal estimates within the Treasury Department indicate that a $30 billion IMF program might be sufficient. But private economists have given much higher numbers.
"The fact of the matter," one administration official said Wednesday, "is that we still don't have all the facts."