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Korea Crisis May Hinge on Policy Battle
SEOUL, South Korea -- The battle to contain South Koreas economic crisis may well hinge on a quiet struggle to sway the thinking of President-elect Kim Dae Jung, pitting his longtime activist allies against business-minded politicians and technocrats also in his camp.
Mr. Kim has moved swiftly to embrace crucial economic reforms since his election Thursday, warning that revitalizing this countrys beleaguered economy will involve unprecedented pain. But investors remain dubious that the populist Mr. Kim, who repeatedly risked his life in the decades-long struggle to bring democracy to authoritarian Korea but has little experience in economic affairs, can craft a credible agenda for steering the nation out of its financial crisis.
Koreas currency and stock markets continue to be roiled by worries over the economy and political uncertainty. The currency, the won, opened today sharply lower at 1,660 won per dollar, down 6.6% from Fridays close of 1,550. On Friday, the won briefly fell more than 10% against the dollar before finishing 4.5% lower than the previous trading day. But stocks opened 2.2% higher today on hopes that key reform laws will soon be passed; stocks dropped 5.1% Friday and rose just 0.8% Saturday.
Mr. Kim immediately began trying to forge a national consensus last week. He promised his administration would hew to the terms of a $57 billion International Monetary Fund-led rescue, and pledged to push through the national assembly a set of laws that would enable Seoul to do so. The countrys three major political parties agreed Saturday to pass 13 reform bills, including one that will give the central bank greater control over monetary policy but will strip it of its regulatory role over banks and give that to a finance-ministry supervisory unit. Such reforms, sought by the IMF, had been stalled in November in part by street protests by central-bank workers angered by possible job losses.
Mr. Kim also sent a signal of reconciliation Saturday by endorsing the pardon of two former presidents, Chun Doo Hwan and Roh Tae Woo, who were jailed last year in part for accepting bribes and kickbacks. Both were leading figures in a regime that imprisoned, tortured and tried to kill Mr. Kim. The pardon may help rally conservative support for Mr. Kim at a time when he needs backing to implement the IMF austerity program.
Concerns over Mr. Kims economic policy, to be sure, may prove to be unfounded . He is under enormous pressure to please investors and the IMF because of the chaos in the financial markets and the continuing bankruptcies of major Korean companies. "Kim Dae Jung has adjusted to economic reality very quickly," says Daryl Plunk, a fellow at the Washington-based Heritage Foundation. "There is no Rasputin in the [Kim] camp promoting a radical course; in the end, its [Mr. Kim] making up his own mind."
Investors arent yet persuaded. When he was leading Koreas democracy movement, Mr. Kim was suspected by the countrys strongly conservative elite of having leftist sympathies, concerns many here still believe Mr. Kim hasnt fully dispelled. His inner circle-populist legislators and left-leaning academics, many of whom have been with him for his entire career -- includes people who know little about how economies work or have scant enthusiasm for free-market reform.
One of them, a Ph.D.-holding legislator, recently lectured a visiting reporter that U.S.-style capitalism wasnt appropriate to Korea. "Not everything about the Soviet economic model was entirely bad," he said.
As a candidate, Mr. Kim sent mixed signals about whether he was committed to critical economic reforms, such as taming the countrys unruly labor unions. It wasnt until late in the campaign that Mr. Kim endorsed the terms of the IMF package, and even then he supported such market-distorting measures as wage and price controls. Some in Korea fear that Mr. Kims election, the first transfer of power from the ruling party to the opposition, will unleash pent-up resentment from his economically backward home province that Mr. Kim either cannot or will not resist.
Members of Seouls ruling and business leaders also fear they will be targeted for abuse by Kim allies from the presidentelects home base, the long-neglected Cholla province. Such anxieties were reflected in stock trading Friday: Share prices among affiliates of the Samsung Group, Koreas most powerful conglomerate and the owner of an anti-Kim newspaper, opened at their lowest permissible level. Shares in companies of the Kumho Group, a Cholla-based conglomerate, opened at their maximum daily highs.
Newspaper editorials have already condemned Seouls elite for enriching themselves in the economic boom that collapsed last month. At a Chinese restaurant in a five-star hotel in Seouls fashionable Kangnam district, three young and prominent businessmen last week were wondering where they could hide their foreign sports cars and whether they should cancel their overseas holiday plans, lest they risk an audit from tax authorities.
"Even if Mr. Kim himself is not vengeful," said one businessman, the chairman of a large conglomerate, "were afraid his people will think its payback time."
But Koreas immense economic problems are certain to seize Mr. Kims full attention immediately. Korea remains dangerously short of foreign reserves to help support its financial system, despite the first installment from the IMF package and a $1.3 billion bridge loan made available last week by the Bank of Japan. Koreas usable foreign reserves were down to $6 billion early this month at a time when the countrys foreign short-term debt is estimated at $100 billion, including the debt held by overseas branches and subsidiaries of financial institutions.
Fears of a default have prompted foreign lenders to cut off local banks. Korea First Bank, in which the government is planning to take a 59% stake to shore up its capital base, is one example. Its credit lines from foreign banks have dwindled to $1.2 billion, compared with $7.3 billion at the end of last year.
A cash and credit crunch, meanwhile, continues to claim local companies. On Saturday, the stock exchange said Hyosung Motors & Machinery Co., Dongsung Construction Co. and Seokwang Construction Co. went bankrupt after they failed to pay debts for two straight days.
In an interview Friday, Cho Sung Jong, deputy director of the international department at the Bank of Korea, the central bank, said the government is still depositing dollars in the overseas branches of Korean commercial banks to help them meet short-term debt payments. The government also said it will guarantee new overseas loans borrowed by domestic banks totaling $20 billion. "We are supporting [the foreign branches] to avoid a default," said Mr. Cho. "But we cant support them for a long time."
Economists say that the Korean government has in the last week set in motion several important reforms, such as allowing the won to float freely against the dollar and widening the ban that restrict interest rates on short-term deposits.
The government also retained Goldman, Sachs & Co. and Salomon Smith Barney Holdings Inc. to advise it on raising money in the international capital markets. The two firms will offer advice on which markets will be most receptive to Korea when it decides to tap the capital markets, what type of securities will be most attractive to float, and what are the best times to approach the markets.
Goldmans role, say people familiar with the situation, will be similar to the part it played in helping Mexico access the capital markets after the peso crisis three years ago. Goldman last year managed Mexicos exchange of $1.75 billion of new 30-year bonds for about $2.3 billion of Brady bonds.
The Salomon team will be led by Jeffrey Shafer, a former Treasury Department official who helped oversee the bailout of Mexico three years ago. Mr. Shafer was approached by associates of a South Korean cabinet member and then met privately with that member before Salomon was engaged. The Goldman team will be led by Robert Hormats, vice chairman of Goldman, Sachs International, and Carlos Cordeiro, a managing director in Goldmans debt capital markets group who is based in Hong Kong. (In Washington, the Treasury Department said Secretary Robert Rubin, a former co-chief executive of Goldman, had no role in Koreas choice of investment bankers.)
For Korea, the next key step is political: the naming of the next cabinet. Despite his long association with left-wing thinkers, Mr. Kim has in his camp several bold reformers like You Jong Keun, a provincial governor who is an outspoken proponent of open markets and a critic of Koreas powerful labor unions. It was Mr. You who helped persuade Mr. Kim to commit himself publicly to the IMF package.
A person close to the Kim team says Mr. Kim during the election tried to recruit Chae Byung Yul, a powerful ruling-party member with internationalist and reformist credentials. The person says Mr. Chae, who couldnt be reached for comment, declined out of loyalty to his party.
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Crisis in Seoul
WASHINGTON -- Despite the tinge of anti-Americanism running through South Korean society, U.S. analysts dont believe that Seouls financial crisis will turn into a security nightmare for Washington.
Though always unpredictable , North Korea isnt likely to see the Souths economic travails as an opportunity for provocation or to launch an attack. Almost no analyst in Washington expects the South Korean military, which retreated from politics to the barracks a decade ago, to seek power. And 10 years of prosperity and democracy have taken much of the bite out of the leftist protest groups that disrupted life in the 1970s and 1980s.
"I dont think things are going to get so bad there as to create risks for American soldiers," said Larry Niksch, a specialist in Asian affairs who follows Korean affairs at the Congressional Research Service.
Richard Walker, U.S. ambassador to Seoul from 1981 to 1986, agrees the financial crisis shouldnt have a destabilizing effect. He believes the South Korean economy is fundamentally sound, particularly with regard to the solid base built over the years by the creation of a modern infrastructure and an educated population.
A Pentagon spokesman said that as of yesterday the U.S. hasnt raised the alert status of U.S. troops in Korea.