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.