S. Korea to take firm steps against ailing banks

S. Korea to take firm steps against ailing banks

SEOUL (AFP): South Korea's two ailing commercial banks, Korea First Bank and Seoulbank, will be auctioned off in February following recapitalization, the finance ministry said Saturday.

The move heralded major reforms of the country's troubled financial sector promised in return for a US$60-billion International Monetary Fund (IMF) bailout.

The future shakeup is likely to engulf insolvent merchant banks, securities houses as well as insurance companies.

According to the ministry, the two weakest banks will be told this month to write down their equity capital and reduce the number of equity shares to bring their market value up to par value.

Analysts predicted that old shares of the two banks would be exchanged for new shares at a rate of 2.5 to one.

As their shares are currently priced at around 2,000 won per share, down from their par value of 5,000 won, shareholders of the banks would not suffer any great losses from the exchange, they said.

Following the reduction of capital, the government will put in more money and recapitalize them and sell them off in an open bidding in which foreign investors will be allowed to take part, the ministry said.

"The government originally planned to invest 1.18 trillion won ($737 million) in each of the two banks to increase its holdings (of the banks) to more than 50 percent," said Kim Jin-Pyo, a senior official of the ministry said.

"However, the government will put in an additional 200-300 billion won for each to meet the international standard for capital adequacy," he said.

Local newspaper reports said that at least one of the two banks could be sold to foreigners, citing Chase Manhattan as one of potential buyers.

Analysts said the financial sector was in for a sweeping shakeup starting from as early as March, noting that only four or five banks in South Korea were financially sound enough to meet international standards.

Merchant banking will also see most of the 14 suspended merchant banks closed down or taken over by others starting from the end of this month under a government plan to revamp the financial sector. South Korea has 31 merchant banks. Others which fail to meet certain capital requirements by the end of April would also be closed down.

Saturday's announcement came as the government was scurrying to impress an image on foreign investors that Seoul was serious about financial reforms amid fears that the ongoing foreign exchange crisis could reach a new peak when massive foreign debts are due this month.

The Wall Street Journal said Friday that international banks were divided on debt rescheduling terms for South Korea.

Some favored straightforward loans and others bond issues or instruments to turn private bank debt into government-backed bonds, the daily said.

"There's a broad range of things we should contemplate. As long as the (recent one-month short-term) rollovers are holding, (the Koreans) have time to come up with a plan," an unnamed IMF source told the daily.

A JP Morgan proposal for restructuring South Korea's debt suggests converting short-term debts falling due in 1998 into government-backed securities with maturities of one, five and 10 years, the daily said.

According to new government statistics confirmed by the IMF, South Korea's total external liabilities stood at $159.6 billion at the end of November, including the overseas obligations of South Korean banks and their branches.

Some $92.2 billion of the debts are coming due in less than a year.