December 30, 1997
Banking leaders from the United States, Japan and Europe met to discuss the state of their loans to South Korean banks. At the end of the meeting, the groups announced that they would support efforts to reduce pressure on the ailing economy. Margaret Warner discusses the banks' decision with economic historian Ron Chernow.
MARGARET WARNER: Private bankers from the U.S., Europe, and Japan met in the world's financial capitals yesterday to discuss how they could help ease South Korea's credit crisis. Press reports differ on exactly what they committed themselves to do. But at the conclusion of the meetings the bankers issued a joint statement saying they "share the view that the Korean economy is strong," and that they would "support efforts to alleviate Korea's short-term liquidity concerns." To tell us more about this we're joined by Ron Chernow, an economic historian and author of several books, including "The House of Morgan" and "The Death of the Banker." Welcome, Mr. Chernow.
A RealAudio version of this segment is available.
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International Monetary Fund
RON CHERNOW, Economic Historian: It's good to be here.
The roll over plan.
MARGARET WARNER: What banks are involved in this, and what are they prepared to do?
RON CHERNOW: Well, we have banks from the United States, Japan, and Europe involved. In fact, the American banks have approximately $9 billion in loans to Korea, the Japanese banks about $24 billion, and the European banks around $34 billion.
MARGARET WARNER: And what are they--so what are they talking about doing to ease the credit crunch?
RON CHERNOW: Okay. This crisis, Margaret, was precipitated by the fact that tomorrow South Korea has $15 billion in debt coming due. Rumors began to circulate last week that South Korea had only 7 or 8 billion dollars in foreign exchange left. As it was clear that South Korea was beginning to lurch towards default and disaster, the IMF in Washington orchestrated a series of meetings of bankers in New York, Tokyo, Frankfurt, and London yesterday. And what they agreed to do was to roll over the $15 billion in debt for at least one month.
MARGARET WARNER: All right. And let me be clear here. This is the money that, what, banks in South Korea borrowed from international banks? Is it all entirely private, in other words?
RON CHERNOW: This is entirely private, which is a very important political part of the question. This is money that was borrowed by South Korean banks and South Korean companies from private banks in the U.S., Japan, and Europe.
MARGARET WARNER: And how does the amount that these banks hold relate to the total outstanding debt that South Korean entities owe right now?
RON CHERNOW: South Korean's foreign debt is about $150 billion, which is a staggering figure. But there are two really significant aspects to South Korean debt. One is its short-term nature. Nearly $100 billion in debt will come due by the end of 1998, and that's very front-loaded. $40 billion of that will come due by the end of March. The other very significant factor is that these debts are denominated in dollars; that is, the debts were made and must be repaid in dollars. The South Korean currency, the won, has lost 50 percent of its value during the last year, which means effectively that the debt of the South Korean banks and companies that have borrowed in dollars has doubled over that time.
The U.S. role.
MARGARET WARNER: All right. Now, explain, one, why these private banks would be ready to do this, and two, you said earlier that--I think you said Treasury Secretary Bob Rubin had been involved in orchestrating this. Why would the U.S. government, in essence, be behind the scenes trying to orchestrate this?
RON CHERNOW: Well, South Korea is a very important geo-political ally. We have tens of thousands of troops there. We went to war to preserve its sovereignty. It's the 11th largest economy in the world, and I think that the significance of Korea is that it's the fire wall that stands between the Southeast Asia debt and currency crisis and Japan. I think that if South Korea goes, the contagion that we've seen in Southeast Asia will spread to Japan, and that will convert a third world debt crisis into a first world debt crisis that will then affect China, will affect the U.S., could really lead to a full-fledged world financial panic.
MARGARET WARNER: Now, what is the relationship between this action and the $57 billion IMF bailout that was announced a few weeks ago?
RON CHERNOW: You know, it's really remarkable. When the IMF announced on December 3rd its $57 billion bailout, it was the largest financial rescue package in history. And I think that the IMF and the Treasury Department probably imagined that world markets would tremble at the magnitude of this. In fact, the situation has steadily deteriorated since then. The South Korean currency, the won, has actually depreciated 35 percent since that was announced. As a result, what has happened, as you see, you mentioned before that the IMF speeded up another $2 billion to South Korea today. The entire timetable has been accelerated because the crisis is so much deeper and braver and more urgent than we had realized before.
MARGARET WARNER: Now, when we say--when you say or I say that these banks are going to roll over the loans, what does that really mean? Are the banks taking a loss? Are they taking a temporary loss, no loss? What are they really doing?
RON CHERNOW: No. It means that they could call in the loans. It means that the debts are probably not being serviced. If the banks were to call in the loans, the South Koreans would not be able to pay the loans. So that you have a situation where regulators in the U.S., Japan, and Europe are essentially saying to the banks that you can carry non-performing, that is, non-paying loans on the books because we're afraid that if you demanded payment, this would push South Korea into default and that it might lead to a generalized panic and collapse in South Korea.
Is the U.S. bailing out private bankers?
MARGARET WARNER: Now, the IMF bailout has been criticized by some on Capitol Hill as essentially and directly bailing out private western banks. Is that true? Does this decision by the bankers relate to that in any way?
RON CHERNOW: This is a problem that the economists always refer to as moral hazard because every time you bail out one country, you virtually guarantee that it will set up a debt crisis in another country, because investors become heedless knowing that there's a lender of last resort who will bail them out. The problem is that if you were Treasury Secretary Rubin, you have to be concerned with preserving the soundness of the entire system. It's impossible to preserve the financial soundness of the system without bailing out individual creditors at the same time. Nobody in financial history has figured out a way to selectively punish the creditors without creating a general problem.
MARGARET WARNER: But just to complete the circle, some of the IMF bailout money, which is, of course, taxpayer money, does it ultimately go to repay the western banks?
RON CHERNOW: Well, I think that one of the reasons we had these meetings in New York yesterday was precisely because the Clinton administration wanted the private bankers to be putting up money, or at least promising to roll over money, before they paid additional money to South Korea in early January. Now, the paradox of this situation is that we have what has been a private debt crisis, but the response to it has been orchestrated by public entities, whether the U.S. government or the International Monetary Fund. And I think that President Clinton and Treasury Secretary Rubin wanted to show that the rescue operation would have both a private and a public component to it, so that when Congress returns in January, and there will, undoubtedly, be howls of outrage, that they could point to the fact that the private bankers are pitching in and trying to help to solve their own problems.
MARGARET WARNER: And in a nutshell, what does South Korea now have to do to make this decision a good risk, to pay off essentially the decision by these bankers to do this?
RON CHERNOW: This is the most important aspect of the whole situation because basically what the bankers are doing are giving Korea time to solve their own problems. We can solve Korea's problems in many ways. The most important thing that happened yesterday is not the bankers rolling over the loans but the South Korean government instituting long overdue reforms, including deregulating interest rates, toughening banks' supervision, opening Korean banks and industrial companies to find ownership. This actually gives the South Korean government time to institute these reforms.
MARGARET WARNER: All Right. Well, Mr. Chernow, thank you very much.
RON CHERNOW: My pleasure.