World Bank OKs Record $3-Billion South Korea Loan

WASHINGTON — The World Bank approved a $3-billion loan for South Korea, the first installment of the bank’s share of a $60-billion international bailout package.

The loan, to help South Korea meet short-term debt repayment needs, is the largest ever made by the World Bank.

“We regard this loan as a symbol of Korea’s commitment to structural reforms that in time will help restore the health of a fundamentally sound economy,” said James Wolfensohn, president of the World Bank.

“Our long-term view of Korea’s economic prospects remains strongly favorable,” he said.

The funds will be immediately available to South Korea.

Bank officials said the loan would carry a “higher than normal interest rate,” of 1.5 percentage points over the London Interbank Offer Rate, or Libor. The current benchmark Libor is 5.906%.

The cash infusion was needed quickly to satisfy short-term creditors who are demanding $15 billion from South Korea by the end of the year.

But South Korean stocks tumbled for a third day, as a faltering won and record interest rates push many companies closer to insolvency.

The South Korean won tumbled 12.5% to a record low of 1,961 won per dollar Tuesday after Moody’s Investors Service and Standard & Poor’s lowered the country’s foreign-currency debt rating to junk status. The won was little changed at 1,930.

“The market situation can’t get worse than this,” said Choi Young Shik, an analyst at Ssangyong Investment & Securities Co. in Seoul.

The country’s main stock index was off 2.7% at midday, after plunging 6.13% Tuesday.

Tuesday’s action by the 181-nation World Bank follows a decision last week by the Asian Development Bank to provide $4 billion.

The World Bank money is the first installment in a pledge by the agency to supply South Korea with up to $10 billion as part of the broader rescue package assembled by the International Monetary Fund.

The overall bailout includes $5 billion in federal money from the United States, which, like other economies worldwide, is feeling the effects of the crisis in Korea and other Asian nations.

Last week, the IMF forecast that the U.S. economy would grow only 2.4% next year instead of the 3.8% growth this year, with part of the slowdown attributed to the fallout from the Asian crisis.

The World Bank loan is aimed at helping South Korea reform its troubled banking sector. The speed of approval was driven by concerns that a default by South Korea on any loans coming due soon could ripple quickly through other countries, particularly the Japanese banking system, which is already struggling with its own heavy load of bad debt.

The fear is that further shocks to Japan, the world’s second-largest economy, would lead to an even bigger fallout in other major economies, including the United States.

Market analysts have been warning that South Korea could face a national bankruptcy unless emergency foreign loans are obtained to meet the huge short-term debts.

“We don’t know if we can manage tomorrow or the day after,” President-elect Kim said Tuesday after discussions in Seoul with top U.S. officials.

* PRICEY PROBLEM: Callaway Golf Co. is feeling the sting of Asia’s economic troubles. D2