Korea: $22 Billion In Debt? No Problem!

A talk with Bill Rhodes, who restructured Korea's loans

In December, South Korea was on the brink of collapse. Its fragile financial sector was hemorrhaging up to $1.7 billion a day. With billions of dollars in short-term bank loans due to mature in the first quarter of 1998, Korea was at the mercy of its global creditors.

Who better to plead Korea's case before its anxious lenders than William R. Rhodes, Citicorp vice-chairman and seasoned financial fireman? After spending the previous decade extinguishing the Latin American debt crisis, the 62-year-old banker knew the drill. Rhodes's team won a temporary reprieve just days before the New Year.

Then Rhodes set out to persuade commercial banks to keep Korea's credit lines open until Mar. 31, the end of Japan's fiscal year. If Korea was to survive, its biggest creditors, the ailing Japanese banks, needed to stay healthy.

After leading debt-exchange negotiations in New York, Rhodes set out on Feb. 26 on a whirlwind global road show. He and Korean government officials visited Korea's major creditors in Tokyo, New York, Paris, Frankfurt, and London. Persuading international lenders to extend the debt rollover was made easier by the presence of the International Monetary Fund. At every presentation, an envoy from the fund assured bankers of Seoul's commitment to economic reform.

Some foreign banks signed on during the road show, others later. But by Mar. 12. Rhodes had a deal. He and Korean Finance Minister Lee Kyu-sung announced that most of the 1998 Korean bank debt would be extended for one, two, and three years. That same day, BUSINESS WEEK International Finance Editor Kerry Capell discussed the negotiations with Rhodes.

Q: What is the importance of this deal?

A: The most important thing is that it creates confidence in Korea and its ability to reform its economy. It's led international banks to significantly increase voluntary trade financing, which is important in inducing positive economic growth. It also should cause the rating agencies to make additional upgrades for Korea, since it will be the first troubled Asian country to access the capital markets after the crisis. This will allow the Koreans to tap the international capital markets for new money that will help turn the economy around. Finally, this deal will help Korea's new administration get off to a positive start.

Q: How will this impact the rest of Asia?

A: Thailand and other Asian countries would like to return to the markets to raise capital. In fact, Thailand may go back to the markets in May, so they're looking to Korea to lead the way.

Q: How much debt will be renegotiated?

A: The total debt eligible to be rolled over is $22.5 billion. To make the deal happen, we needed a minimum tender of $17 billion. With $21.83 billion, we have commitments to extend 97% of the debt.

Q: Some critics say that the interest rates you negotiated were too low.

A: The interest rates we got on the deal--2.25% over six months' LIBOR [London interbank offered rate] for one year, 2.5% over six months' LIBOR for two years, and 2.75% over six months' LIBOR for three-year paper--were just about right.

Since we announced it, rates have fallen considerably for Korean paper in the international markets. The tremendous reception this received in the marketplace shows that banks were satisfied with these terms.

Q: What was the IMF's role?

A: The fund sent Hubert Neiss, head of their Asia Pacific department, to all the presentations except for New York, where we were accompanied by Stanley Fischer. They helped convince creditors that the Koreans were successfully opening up markets and proceeding on the economic reforms.

Q: What were the major challenges in pulling this together?

A: Since the presidential inauguration of Kim Dae Jung was not until Feb. 25, we had to deal with both the incoming and outgoing governments. If we had waited until he had named his new Cabinet to set the terms of the deal, we would have lost over a month. This would have made it difficult to get the deal signed by the end-of-March deadline.

Q: How can these crises be averted?

A: The IMF and the World Bank are mandated to track the macroeconomic numbers in these countries. In the future, they should take this information public more rapidly. There also needs to be increased dialogue between these international financial institutions and the private sector. The IMF couldn't stabilize the Korean situation on their own. They needed the private sector's help because that's who's holding the debt.

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