South Korea, IMF Finalize $55-Billion Bailout Plan

SEOUL — South Korea and the International Monetary Fund put the finishing touches Wednesday on a rescue plan of at least $55 billion that is likely to double the nation’s unemployment and slam the brakes on economic growth to the slowest pace in 18 years.

The conditions attached to the bailout, the largest ever, also call for South Korea to liquidate or restructure banks, invite more foreign investment and products, slash government spending and raise taxes.

The harsh medicine is in return for bailout funds that will be largely used to reinforce the foreign currency reserves of the Bank of Korea, the country’s central bank. That will enable it to help South Korean firms refinance overseas loans. About $20 billion of foreign debt is due this month, and an additional $50 billion matures in 1998.

The rescue plan consists of $21 billion from the IMF, $10 billion from the World Bank and $4 billion from the Asian Development Bank, plus backup credit lines of $10 billion from Japan, $5 billion from the United States, and lesser sums from Britain, France, Germany, Canada and Australia.

IMF Managing Director Michel Camdessus said the “far-reaching” reforms required as conditions of the bailout will help the South Korean economy recover. “I am confident this program will also contribute to the needed return of stability and growth in the region,” he said.

The contributions from individual countries are backup financing in case unanticipated events create the need for additional funds, Camdessus said.

The U.S. money, if needed, would come from the Exchange Stabilization Fund, which is under the control of the Treasury secretary. Congressional authority is not needed to disburse the money. The fund contained about $40 billion as of the end of March, the most recent figure available.

The signing of an agreement after days of confusion reassured markets. After 10 consecutive daily losses that slashed the Seoul stock market value by nearly one-third, the benchmark Kospi index rose 0.7% to close Wednesday at 379 points. Several bank stocks rose by their daily 8% limit.

The battered currency, the won, rose nearly 3% Wednesday. Late in the day the dollar was at 1,166.2 won, down from an earlier high of 1,300 won. The won is down 24% against the dollar since late October.

In early trading today, the Kospi index soared by 6%.

The largest previous international rescue package was the $50- billion bailout arranged for Mexico in 1995. Wednesday’s deal followed recent IMF-led bailouts of Thailand and Indonesia as a flood of currency devaluations, bank collapses and market crashes swept Asia.

South Korean Finance Minister Lim Chang Yuel said in a televised statement to the Korean people: “We are expecting a higher unemployment rate as the economy slows. . . . 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.”

The IMF has requested that the three leading contenders in a Dec. 18 presidential election sign pledges that they will abide by the terms of the bailout package if elected.

Two of the candidates--ruling party nominee Lee Hoi Chang and Rhee In Je, who broke away from the ruling party to enter the race--quickly agreed, South Korean media reported. Longtime opposition leader Kim Dae Jung, however, said that while he could support the terms “in principle,” he objected to signing an IMF pledge.

But whoever is elected president will need to abide by the agreement’s terms--or successfully renegotiate them--in order to prevent massive defaults that would further cripple the economy.

Official approval of the package still awaits IMF board action in Washington. Full terms of the agreement are due to be formally announced only after that, but many details have already leaked out. They include:

* Various economic belt-tightening measures that, in the estimate of IMF economists, would result in economic growth of 3% next year, compared with 6% this year and an average of 8.6% over the last two decades. That would be the slowest growth in 18 years, and is expected to lead to at least a doubling of unemployment.

* Holding inflation to less than 5% and the current account deficit to below 1% of GDP, or about $5 billion. The deficit in this broad measure of trade in goods and services is projected at $13 billion this year, down from a record $23.7 billion in 1996.

* Raising the limit of foreign ownership of stocks in South Korean firms to 50% from the current 26% almost immediately, with a further rise to 55% in 1998.

* A tight money supply and high interest rates.

* Lower government spending and higher taxes.

* Approval this year of financial system reforms that failed to win legislative approval last month. The measures would guarantee the independence of the central bank and assist in restructuring of troubled banks.

* Further liberalization of South Korea’s domestic market in accordance with World Trade Organization rules, including more foreign direct investment and foreign participation in banking services.

* Requiring consolidated earnings reports by corporations to make their financial conditions clearer, and stricter auditing of large financial institutions.

* Cutting restrictions on imports of particular products from certain countries. South Korea has long had such policies, largely designed to avoid too big a trade imbalance with Japan.

* Reducing low-interest loans to local exporters and eliminating debt payment guarantees among firms that are parts of large business conglomerates, a step aimed at lessening the risk of chain bankruptcies of units in a group.

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Chi Jung Nam of The Times’ Seoul bureau contributed to this report.

* EXPORT DEMAND SLOWS: The Asian financial crisis is slowing demand for U.S. exports, the Federal Reserve Board said. D3