The Korean debt deal has enthused the Seoul stockmarket while it has breathed new life into the won. The financing terms for $24 billion of South Korea's $30 billion short-term loans are also better than expected. The deal should end the country's liquidity crisis, and the economy's inherent strengths can now work again to re-establish its international credibility.Once private funds start flowing back into the country, that will be the signal that the remedy has worked. While the deal has provided a breathing space to the government, international bankers have been the real gainers. Private debt has now become sovereign debt. With the government guaranteeing the repayment of private debt, what has happened is that the debt has been socialised. Why should the government guarantee the returns of private bankers who had made wrong credit decisions? Would it not encourage bankers to persist in faulty credit decisions? In order to earn the high returns, banks know perfectly well that they run high risks. Andyet, instead of sharing the problems which have affected the region, international banks will actually be making more money on the deal. Surely this was a fit case where the debt needed to be treated as private debt.
One way out for the Koreans, as one investment banker has suggested, would be to issue long-term bonds, a new version of the Brady bonds, backed by the collateral of the NPAs charged to the bankers. These bonds could then be sold at a discount in the market. Clearly, the political obstacles to such a deal, in which banks too would lose a portion of their money, would be insurmountable. Nevertheless, the fact remains that globalisation of finance seems to be a one-way ticket to supernormal profits for international banks.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
