SEOUL, Dec 2: An International Monetary Fund (IMF) rescue package would lead to carnage in South Korea's fragile financial sector, analysts said on Tuesday, with foreign cash injections seen as the only solution.

``In the wake of the IMF bailout package, a big shakeout in the financial industry looks inevitable,'' said banking analyst Kim Chul-jung at Ssangyong Securities.

Responding to IMF demands, South Korea's finance ministry said on Tuesday that it was suspending business activities of nine merchant banks which it said were having ``difficulty operating normally''.

But while South Korean media said that negotiators of the two sides were haggling over the future of some highly leveraged commercial banks, finance minister Lim Chang-Yuel said that the liquidation of commercial banks was not part of the IMF deal.

Regardless of Lim's comment, few analysts hesitated to name which banks would be the next victims to be liquidated in the grand shakeout of the country's backward financial sector. ``There was some speculation that commercial banks might be spared from closures after all,'' said Jung Ho-Chull, a broker at LG Securities.

Some analysts at home and abroad said that liquidation or mergers would start with Korea First Bank and Seoul Bank. State-run Korea Asset Management Fund has already purchased 4.4 trillion won ($3.75 billion) of their bad debts.

``Korea First and Seoul Bank, on any measure, are as close to insolvency as they can get,'' said Steve Frost, associate research director for UBS Securities in Singapore.

But officials of the two banks strongly denied that they were facing insolvency. Non-performing loans held by commercial and specialised banks totalled 28.53 trillion won at the end of September. Lim Choon-Soo, research head at Goldman Sachs, said that total loans by the country's big city commercial banks comprised 40 per cent of the financial system's loans and 54 per cent of Korea's gross domestic product.

Korean financial institutions have fallen behind those of advanced countries in freeing themselves from central control. Their traditional role has been to funnel scarce capital at favourable government-set terms to industries considered crucial to the country's rapid economic development.

``While everyone is aware of the problems faced by Korean banks, there are no clear answers apparent for the problems on hand,'' Lim said.

South Korea wanted to give even the weakest banks a chance to restructure before liquidation or mergers. But analysts said that less government intervention and a revision in ownership structure to lure foreign capital injections into domestic banks should come first. ``The crucial point is who can recapitalise troubled banks and how,'' said a banking analyst at a foreign securities firm.

SK signs package with IMF

South Korea reached a tentative agreement on Tuesday on a big loan package with the International Monetary Fund (IMF) requiring Seoul to close or merge troubled banks and lower economic growth, state media said.

State Korea Broadcasting System (KBS) said Finance Minister Lim Chang-yuel had agreed to liquidate several troubled merchant banks and allow third-party takeovers of commercial banks at a pre-dawn negotiating session with the IMF team in Seoul. It also said Seoul had agreed to open its financial markets further.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.