SOME STRINGS ATTACHED?
December 12, 1997
As its currency continues to plummet in value, South Korea has agreed to a record-breaking $57 billion bailout from the International Monetary Fund. After a background report by Kwame Holman, Margaret Warner speaks with Michel Camdessus, Managing Director of the IMF, about the issues surrounding international loans to financially troubled nations.
KWAME HOLMAN: South Korea is the latest in a long line of economically distressed countries to turn to the International Monetary Fund for help, and fixing South Korea's financial crisis may be the sternest test yet for the IMF, the world's lender of last resort since the end of World War II. The IMF is based in Washington, D.C., and holds nearly $200 billion in assets, contributions from its 181 member nations. The United States pitches in the biggest share of that total, 18 percent, giving it the most influence over IMF priorities. Germany and Japan are the next largest contributors, at about 6 percent each. For the last 10 years the IMF has been led by managing director Michel Camdessus.
A RealAudio version of this segment is available.
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International Monetary Fund
MICHEL CAMDESSUS, International Monetary Fund: It is a time for clear choices, bold choices. It's time to take to the high road.
KWAME HOLMAN: Along with his team of economists, Camdessus has structured loans for the faltering economies of nations around the world. IMF loans are given in stages and come with strings attached.
"The IMF is not a fairy godmother. The IMF does not offer easy solutions."
WILLIAM KEELING, Indonesian Securities Broker: The IMF is not a fairy godmother. The IMF does not offer easy solutions.
KWAME HOLMAN: Often the fund requires that recipient governments institute tough measures, such as cutting spending, raising taxes and interest rates, and closing insolvent or inefficient banks and other financial institutions. The IMF funds frequently are backed up the option of additional loans from rich nations like the United States. In 1995, the International Monetary Fund spearheaded creation of the rescue package for Mexico that included $51 billion in loans. This year, the IMF's focus has been on Asia, where several nations suffer from a financial flu that's caused investors to flee.
In August, the IMF put together a $17 billion aid package for Thailand, after its currency, the baht, collapsed. In October, after Indonesia's stock market and currency crashed, the IMF came forward with a $40 billion bailout. And when corporate bankruptcies in South Korea led to ballooning bad loans at its banks, the International Monetary Fund negotiated a record $57 billion in loans to the South Korean government.
LIM CHANG-YUEL, Foreign Minister, South Korea: (speaking through interpreter) Today's agreement will open up a new door for the South Korean economy to enter into a new era.
To many South Koreans, the agreement was "National Humiliation Day."
KWAME HOLMAN: Many proud South Koreans, embarrassed by the need for the IMF aid, now call the day the agreement was signed "National Humiliation Day." And since then, problems have continued. The South Korean won has fallen in value daily, and political uncertainty in the run-up to next week's elections to replace President Jung Sam have added to the economic unease. Outside the country critics are skeptical South Korean officials will institute the austerity measures called for by the IMF. They point to this week's move by the government to prop up two large insolvent banks, rather than letting them fail.
JIM LEHRER: Earlier today, Margaret Warner spoke to IMF Managing Director Camdessus.
MARGARET WARNER: Well, thank you for being with us, Mr. Camdessus. Last week, the IMF announced a major bailout package for South Korea. Yet, this week the South Korean currency continues to fall. Why is that?
MICHEL CAMDESSUS, International Monetary Fund: No wonder No wonder at that. Such a package is there for restoring confidence over time, and to head the country to fix its economy. You don't do that overnight, and remember our experience with Mexico in the beginning of 1995. It started in terrible conditions. Nobody believed that this would work. Now, two and a half years afterward, Mexico is growing at seven percent a year better than ever in its history, and I expect to have the same result in Korea. But we must be patient, and we must be now committed to our program, deliver what we promise, and our friends in Korea must do the same.
MARGARET WARNER: Why do think international investors seem still skeptical?
MICHEL CAMDESSUS: Well, I will tell you, we are here in a very special context in Korea. The crisis has been totally unexpected. The psychological shock for the people of Korea has been tremendous. All of that arriving during a presidential campaign which is just finishing next week, you could imagine that in such a context the declarations of the one--the roles are contradictory and nobody knows exactly where the country is, but what I can tell you is that the government of Korea is delivering what it has pledged. Of course, the markets know that more or less. They are skeptical; they must be, but you will see that what we had in the case of Mexico, if you allow it to be for the special circumstances, will be repeated here.
MARGARET WARNER: So... but are you troubled at all, for instance, that the estimates of South Korea's debt turned out to be now double what they originally said just a month ago, whereas the estimates of the reserves are only half what they seem to say? I mean, some of these seem to be the signals that international investors find troubling.
MICHEL CAMDESSUS: They are troubling. I understand their trouble, but the negotiation of the program with us has allowed this situation. You have helped the Koreans to recognize the facts. In Korea, in many developing countries in similar circumstances, you start by a tremendous denial of the reality, and you must address this syndrome of denial, but then little by little they recognize the magnitude of that, they recognize the low level of their reserves, and on the basis of these realities we have helped them to discover. They have together their program--we have put together our financing, and we believe that the financing is sufficient, and then the markets, when they will have checked the numbers, and we are helping them to change the numbers, we'll see that all of that fits once again, provided everybody complies with what is committed.
MARGARET WARNER: We read a lot about popular resentment among Korean people about the need for the IMF bailout, the IMF bailout, the conditions, the feeling that the West is using this to force open their markets.
In South Korea, popular resentment of the IMF loan.
MICHEL CAMDESSUS: Well, I understand pretty well this phenomenon. The people of Korea are a very proud people and legitimately proud of their achievement. What the IMF seems to enforce to Korea in reality is something all the key observers of Korea in Korea were saying six years that it had to be done. You had in Korea a very special system of, I would say, incestuous relationship between the state, the banks, and the corporate sector, all of that having relations not at all determined by the market. And this was well at the beginning when the country had to be--had to get a good start, but when the complexification of the economy, with the unescapable opening of the economy in a context of globalization, this no more worked. It's not an international imposition. It's the help of the international community to Korea for recognizing the problem and helping them to find the shortest way toward a recovery.
MARGARET WARNER: I'm sure you've also read some of the criticisms from some international economists that the IMF or the Asians economies are, as you just described, so very different. They were thriving emerging markets with some good fundamentals--that your prescriptions are too much like the prescriptions you've had for these small, poor Third World countries that had huge public debt, and so on, and that in a way you're forcing them to contract too much, impose higher taxes and interest rates, and so on. Do they have a point?
MICHEL CAMDESSUS: I cannot share their views. When you have such a crisis of confidence, when you have capital flight, you need to stop that. If not, you don't reconstruct the country, how can you stop capital flight without raising the interest rates? Now, fiscal policy--what are we doing in Korea, for instance, as in Indonesia--is to make sure that the budget is balanced, nothing--nothing more. This does not squeeze the economy. It's a budget deficit which squeezes the economy because it takes your savings from the private sector to the government.
"Why not let a lot of these businesses just fail?"
MARGARET WARNER: Another criticism or concern some people express is that really when you go in to bail out countries like this, that you're bailing out private business, both Korean, let's say, or Asian, and also western investors, who all, you know, thundered in there thinking they were going to make a killing, and the question is why should U.S. and British and Japanese taxpayers essentially do that? Why not let a lot of these businesses just fail?
MICHEL CAMDESSUS: There are plenty of things in your statement I disagree with. First, the word "bailout," bailout is a nautic term, no--you prevent a boat from sinking. The IMF does not do that. Of course, we prevent the country from sinking, but we repair the country. We go much beyond the bailing out. We help the country to create new structures better fitting with the new world in which we are, and where they could do their job, namely improving the human condition of their people on their own, so no more on bailout. Second, are we bailing out private investors from the country and foreigners, from the country--no way. All these banks which are closed or restructured, the shareholders lose their money. The preferred creditors lose their money as if they were in a bankruptcy procedure. Do you believe and for foreign creditors, it's the same thing.
MARGARET WARNER: Do you think we've seen the worst in South Korea?
MICHEL CAMDESSUS: In some way, yes, because the worst was a situation of crisis, developing and being denied by the people of Korea, the government of Korea. Now you have the recognition and you have the diagnosis and you have a program to attack the problem at its root, so in some way, to answer your question, yes, the worst is behind us, provided the Korean people and the French support--persevere in implementing this program.
MARGARET WARNER: And what's your sense of the Asian economies in general on that whole situation? You know, some people speculate that Japan could be next. Do you feel we've seen--do you feel that Asia, itself, has turned a corner?
"Every crisis is a mixture of tremendous dangers and great opportunities. Now we are trying to contain the dangers and help them to be stronger to take advantage of the opportunities."
MICHEL CAMDESSUS: Let me tell you that Japan will not be next. Japan is a rescuer in this business. Japan will not need to be rescued. Now, what about this crisis in Asia? I would say that it's a crisis, it's a transition between the time of the so-called miracles, which were not miracles as a matter of fact, and a time of maturity in a globalized context. Every crisis is a mixture of tremendous dangers and great opportunities. Now we are trying to contain the dangers and help them to be stronger to take advantage of the opportunities.
MARGARET WARNER: Well, Mr. Camdessus, thank you very much for being with us.
MICHEL CAMDESSUS: It was my pleasure. Thank you.