Aid to Korea should be raised to $100b: Analysts
Aid to Korea should be raised to $100b: Analysts
SINGAPORE (Reuters): The International Monetary Fund's (IMF) US$57 billion aid package for South Korea is not nearly big enough to plug Seoul's vast short-term debt gap and needs to be substantially increased, analysts said yesterday.
The short-term foreign currency debt has turned out to be much larger than originally anticipated, twice as large in fact, and by the end of this year alone around US$20 billion is due.
It is the level of short-term debt which is the crucial factor here. Creditors need to have the confidence that there is a suitable package in place before they will consider rolling any loans over.
"What is critical in the next few days, probably by this weekend, is for Korea and the IMF to say something positive," said Daniel Lian, Head of Asian Markets Research at ANZ in Singapore.
"With what they have now Korea will not be able to roll over its short-term debt in the next 12 months.
"I personally think they ought to show people a figure of $100 billion all in. I think that would make the market comfortable because it is exactly the sum of the short-term foreign currency debt."
Other analysts share these opinions. A package around twice the size of the existing one is being widely talked about.
Steve Marvin, head of research at Ssangyong Securities in Seoul, says South Korea needs $50 billion to $60 billion beyond the IMF bailout.
"We are basically in uncharted waters. We know Korea had $171 billion in offshore debt, including unconsolidated and off- balance sheet borrowings. About half of that is short-term so that's $85 billion due in a year or less.
"In addition you have a chain reaction of bankruptcies among Korean financial institutions. I don't really have a figure but it will be at least $50 billion to $60 billion beyond what they're getting from the IMF."
Easing bottleneck
South Korea's central bank said yesterday it would pump 11.3 trillion won ($6.57 billion) into the financial system to ease a bottleneck caused by the temporary closure of 14 merchant banks.
"The whole financial system is breaking down after the merchant banks suspended business," said Park Chul, director of Bank of Korea's monetary policy department.
The central bank would inject 7.3 trillion won from next week to compensate for call loans to the ill-fated merchant banks. The loans have been frozen since the closures.
Two trillion won would be provided to securities houses, one trillion won to merchant banks and one trillion won to investment trust companies.
The central bank would lend a major chunk of the funds at the average call rate or at one point under the average and buy state bonds held by financial firms.
"The money injection is aimed at restoring confidence in the financial system, and not at bailing out individual financial institutions," Park said.
He said the central bank would soon siphon off the money supply through Monetary Stabilization Bonds, repurchase agreements and other open market operations.
"I don't think the money supply violates conditions that come with the International Monetary Fund-led aid," Park said.
In what was seen as a signal of the new belt-tightening regime under an IMF-led $57 billion bail-out package, the finance ministry ordered nine ailing merchant banks to halt operations last week and five more on Wednesday.