World Bank makes $3bn loan as South Korean won hits low as market dives again

As the financial crisis in South Korea deepened further yesterday, with the won hitting a record low, the stock market taking a record one- day dive, and fears growing that Korea could default on short-term loans, the World Bank disbursed a $3bn loan, part of the IMF rescue package. Stephen Vines reports from Hong Kong.

Market watchers in South Korea are running out of negative adjectives to describe the slump of financial markets now under way in the world's 11th largest economy.

The Korean won hurtled down in value by almost 15 per cent, yet another record low, taking the currency to almost half its value in the space of weeks. Meanwhile, the stock market fell by almost 7 per cent, its steepest one-day plunge ever.

It seems that not only are market watchers left groping for words, the President elect Kim Dae-jung said yesterday that he could not "sleep since I was briefed [about the financial situation]. I am totally flabbergasted". Mr Kim, who is no stranger to hyperbole, also said the whole country could be bankrupted in a month or "even one day".

Last night, however, aides to the president-elect moved to play down his comments, made in a Korean newspaper. "The president-elect did not mean there was a real possibility of a national bankruptcy, but wanted to express his willingness to undertake restructuring," said a spokesperson. The British government, which is providing $1.25bn of direct emergency support to South Korea on top of its contributions to the International Monetary Fund, also continues to regard the crisis in the Korean economy more as one of liquidity than solvency. Standard & Poor's (S&P) followed Moody in knocking down Korean sovereign debt, corporate and bank ratings to junk bond levels.

"The lowering of Korea's foreign currency ratings out of investment-grade reflects the agency's view that recent steps taken by the government are inconsistent with the spirit of the International Monetary Fund's rescue programme," the agency said.

The warnings from the credit agencies had spread fears that South Korea would start defaulting on its debts. Many bankers in Seoul believe that some $20bn is due for repayment by the end of the month. However, the Finance Ministry said yesterday that the figure was around $14-15bn, with another $15bn due in January.

A fresh shock was delivered to the system with news that Korea's total foreign debt stood at around $180bn.

The IMF, however, is adamant that its loan will suffice. A spokesperson said: "The question [of whether the IMF loan to Korea will be sufficient] has been asked at various levels. The answer is yes." The IMF had already despatched $9bn of the record $60bn promised aid to Korea before last night's disbursement of a further $3bn from the World Bank last night. The UK provision of $1.25bn has not yet been drawn upon, and Treasury officials are thought to believe no further UK aid will be required. Lee Kang-nam, assistant governor of the Bank of Korea, provided a modicum of reassurance by stating that Korea did not face the possibility of sovereign default, given its increasing supply of usable foreign reserves and an expected inflow of funds from the IMF rescue package which would take the country's foreign reserves to $17.5bn by the end of the year.

A World Bank statement described yesterday's credit as an "economic reconstruction loan" that would "focus on reforms to the financial sector and capital markets". A spokesman said the loan would be for 10 years and charge an interest rate of 1 per cent above the London Interbank Offered Rate that banks charge one another for loans. South Korea would also be charged a 3.5 percent service fee for its use. He said the international lending agency would make a further disbursement to South Korea in the first months of 1998 but did not elaborate on the size of the loan.

The build-up of foreign currency repayments due at the end of the month had forced companies to scramble for dollars. Meanwhile, the sharply lowered credit ratings for Korean banks and the rocketing of interest rates mean that even if it proves possible to roll over debt repayment in the short term, these debts will be far harder to pay off in the longer term. Such is the unease in Korea's financial markets that it brought the debt market grinding to an absolute halt yesterday.

The contagion from Korea swept across other Asian currency markets yesterday, striking with particular vengeance in Malaysia. Japanese markets were closed for a holiday yesterday.

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