Aid to S. Korea seen squeezing Asia liquidity

Aid to S. Korea seen squeezing Asia liquidity

TOKYO (Reuters): The global injection of liquidity into South
Korea to help Seoul ride out its crisis is choking off capital
flows to the rest of Asia as international banks draw funds from
other places, senior analysts say.

"The force of the global effort to stabilize the Korean won
and avoid default by Seoul is rattling other Asian nations as
creditor banks pull money out from where they can," said a senior
analyst at a Japanese brokerage who requested anonymity.

U.S. and European banks have started to withdraw money from
other Asian countries since November, he said.

Furthermore, South Korean banks, once aggressive in making
loans to companies in Southeast Asia, appear reluctant to fully
roll over their loans, bankers said.

This is aggravating the capital crunch in countries such as
Indonesia and Thailand, they said.

The Korean banks are estimated have made as much as $15
billion in loans to Indonesian companies and have underwritten
another $15 billion worth of commercial paper issued by
Indonesian companies, mostly construction firms, they added.

"Banks, in general, would naturally consider pulling money out
of countries with the danger of declaring a debt moratorium,"
said Minori Takeuchi, vice president of the Research Group at the
Global Trading Division of Chase Manhattan Bank.

Global markets were rocked last week on the growing perception
that Indonesia may declare a moratorium on its debt after its
announced budget did not reflect International Monetary Fund
(IMF) recommendations.

IMF First Deputy Managing Director Stanley Fischer, in Jakarta
for talks to solve the quagmire, held a meeting with President
Soeharto earlier on Monday, but gave no specifics.

A U.S. government mission, led by Deputy Treasury Secretary
Lawrence Summers, will arrive in Jakarta later on Monday to
restore confidence by urging countries to stick to policies
prescribed by the IMF.

The mission is expected to visit Singapore, Indonesia,
Thailand, South Korea, Malaysia, China and Japan.

Last week, global bankers meeting in New York reaffirmed
short-term financing for South Korea, buying time for the
battered nation to consider the creditors' proposal for a massive
debt issue to keep the country's banks from defaulting.

Meanwhile, central banks and the IMF set up a surveillance
group to check that Seoul's creditor banks from the United
States, Europe and Japan continue to maintain liquidity for
Korean financial institutions instead of fleeing, bankers said.

"Under this unusual surveillance, in which banks are forced to
keep a money flow to Seoul, they are more motivated to cut back
on other Asian exposure," said the senior analyst at a Japanese
brokerage.