|The following item is a Letter of Intent of the government of Korea, which describes
policies that Korea intends to implement in the context of its request for financial support
the IMF. The document, which is the property of Korea, is being made available on the IMF
website by agreement with the member as a service to users of the IMF website. |
Mr. Michel Camdessus
July 24, 1998
International Monetary Fund
Washington, D. C. 20431
Dear Mr. Camdessus:
1. We are pleased that, during our discussions with the IMF over the past two weeks, we have
again reached a common understanding on the state of the Korean economy and on the
for reform in the period ahead. These policies are described in the attached Memorandum on
Economic Program. Since the last review in May, macroeconomic policies have been eased
contain the extent of economic downturn. At the same time, Korea has been intensifying its
reform efforts in all major sectors of the economy. Priority has been given to reform of the
banking system, which is key to the success of other restructuring efforts. Corporate reform is
also gaining momentum. The government has been working closely with the World Bank and
put in place a framework for corporate debt restructuring, including procedures for debt
workouts. The government's corporate restructuring plan, which has been agreed with the
Bank in the context of a Structural Adjustment Loan, is attached to the Memorandum on the
2. Additionally, the voluntary restructuring of the large conglomerates is advancing through
disposal of assets, attraction of foreign capital, and rationalization of business operations. In
recent weeks, ambitious plans have been announced for the immediate privatization of five
public enterprises, to be followed by the gradual privatization of six others.
3. The domestic economy, however, appears to be falling further into recession and consumer
and investor confidence is at a low ebb. Unemployment has increased faster than previously
expected and more layoffs are expected to result from the acceleration of restructuring.
Externally, the weaker regional economic environment has begun to have a negative impact
4. With the strengthening of the external position, we have decided to shift the focus of
macroeconomic policies toward supporting an early recovery of domestic demand. The
government's priority is to take strong actions at this time to contain the economic recession
manageable level. On the fiscal side, the budget deficit will be expanded from 1 3/4 percent
percent of GDP. This is consistent with the international consensus on fiscal flexibility as
expressed in the recent Joint Manila Framework/G7 Deputies Meeting in Tokyo. Higher
government expenditures will be used to bolster the social expenditure program, increase
overhead capital investment, as well as to moderate the credit crunch in small- and
enterprises, trade financing and the housing sector.
5. The recent strengthening of the won has signaled a return of market confidence and
an opportunity for continued easing of monetary policy. The government intends to take
advantage of exchange rate stability to further reduce interest rates in the period ahead.
6. Korea, under the strong leadership of President Kim Dae-jung, remains fully committed to
ongoing reform process. Our policies for the remainder of 1998 are set out in the attached
Memorandum on the Economic Program for the third Quarterly Review which updates the
Memorandum on the Economic Program of May 4, 1998. We will continue to work in close
collaboration with the Fund and World Bank on developing and implementing policies to
strengthen our financial system and industrial base so as to place Korea back on a path of
and sustainable growth.
Bank of Korea
Minister of Finance and Economy
Korea: Memorandum on Economic Program, 1998
||Recognizing that the downturn in economic activity is
be more severe and protracted than anticipated, economic policies aim to:
- boost confidence and consolidate the progress made in resolving the external financing
- support a recovery of domestic demand and strengthen the social safety net so
as to mitigate the hardship of the unemployed;
- press ahead with financial sector and corporate restructuring so as to lay the foundation
for the resumption of sustained growth.
|Macroeconomic objectives for 1998 are:
- containing the decline in real GDP to 4 percent, with recovery starting in 1999;
- inflation averaging 9 percent, and declining by end-year;
- a current account surplus of US$33–35 billion.
|Monetary and exchange|
- The monetary program is designed to provide adequate scope for accommodating a
gradual reduction in interest rates, without jeopardizing the inflation target.
- Call interest rates will continue to be lowered, subject to the broad stability of the won in
nominal effective terms. More generally, interest rate policy will continue to be conducted in
flexible manner with upward and downward adjustments as necessary.
- Exchange rate policy will remain flexible and BOK intervention will be limited to
|Reserve management policy
- Usable reserves are expected to increase to US$43 billion at end-year.
Consequently, the end-December target of US$41 billion should be met
- The BOK foreign exchange window was closed
effective May 15, 1998 and schedules to repay emergency support by end-June 1999 have
agreed with banks; penalty interest rates have been reduced to 400–600 basis points
LIBOR. Any amounts overdue in terms of the repayment schedules will be subject to a
interest rate of LIBOR plus 800 basis points.
- In order to support economic activity and to further
strengthen the social safety net, the Supplementary Budget to be passed in August increases
deficit in 1998 to 4 percent of GDP, which is consistent with allowing the automatic
- The increase in the deficit will be primarily financed by market issuance of government
bonds. To facilitate timely disbursement of spending, the issuance of bonds will be initiated
advance of planned spending.
|Measures to be taken in the August Supplementary
- a 30 percent increase in social safety net expenditure;
- an 8 percent increase in social overhead capital expenditure;
- an increase in net lending of 25 percent;
- a 30 percent reduction in special consumption tax rates on consumer durables and
automobiles (effective July 10);
- an increase in the excise taxes on gasoline and diesel to remove distortions in relative
and to address environmental concerns;
- a 10 percent increase in the rate of withholding tax on interest income.
|Social Safety Net
- To augment its contribution to the social compact with labor and business, the
has increased its commitment to provide expenditures on the social safety net, including
unemployment insurance, from W 7.9 trillion to W 10.4 trillion (about 2 1/2 percent of GDP);
- The government will continue to keep under close review the adequacy and effectiveness
social safety net expenditures in light of the economic situation.
|The social safety net has been expanded by providing
In addition, by early-1999 the coverage of the unemployment insurance system will be
widened to all firms (from firms with more than five employees) and to part-time and temporary
- an additional W 1.0 trillion in transfers to the unemployed;
- an extra W 0.5 trillion for public works;
- a further allocation of W 1 trillion for loans to the unemployed;
|Fiscal contingency measures
- In order to ensure that fiscal policy provides the intended support to the economy,
government will take all necessary measures, including securing the requisite financing, to
realize the budgetary spending target and allow the automatic stabilizers to work fully.
- The government will continue to closely monitor the economic situation in consultation
the Fund with a view to undertaking timely corrective policies in the event that the economic
downturn proves to be significantly worse than expected. In such event, the government will
introduce additional fiscal measures, including increasing spending in
categories and on the social safety net to avoid a withdrawal of fiscal stimulus.
|Temporary assistance to|
- Up to $3.3 billion in trade financing will be provided on commercial terms to small- and
medium-sized enterprises, and larger enterprises not affiliated with the top five chaebols, for
periods of up to one year, comprising;
- US$3 billion for import financing, of which: US$1 billion has been financed
World Bank's SAL, and a further US$2 billion will be provided if necessary from reserves in
excess of program targets. Of the latter, at least US$1 billion will be reserved for small-and
- US$0.3 billion in BOK rediscount of export bills for small- and medium-sized
- Guarantee ceiling of Credit Guarantee Funds for small- and medium-sized enterprises
been raised by W 10 trillion through an injection of W 0.5 trillion. A further increase is being
||The government has announced immediate privatization of 5
state-owned enterprises and their 21 subsidiaries, and gradual privatization, by 2002, of 6
|Financial Sector Restructuring
|Type of measure
|The remaining 7 of the 12 undercapitalized banks will submit
||July 31, 1998
|The FSC to announce its decisions on the implementation
If a plan is agreed, on the basis that it is likely to be achieved, the bank and the FSC will
MOU which will include:
- a sufficient initial increase in capital that makes the attainment of minimum capital
requirements feasible and credible;
- a clear timetable for achieving specific performance indicators including improvements
capital ratios to 6 percent by March 1999, 8 percent by March 2000;
- banks will be encouraged to increase their capital ratios further to 10 percent by
- for regional banks that do not engage in international business and commercial banks that
not lend in amounts above W 5 billion to an individual corporate and that do not engage in
international business the timetable will be 4 percent by March 1999, 6 percent by March
and 8 percent by December 2000;
- a timetable for progressive cost reductions;
- a clause requiring further capital increases on account of:
(i) supervisory examinations leading to a reclassification of assets;
(ii) any further deterioration in asset quality;
(iii) the strengthening of supervisory rules and procedures.
|September 30, 1998
|Banks whose implementation plans are not approved,
subject to mandatory mergers or transfer of business under P&A, or exit under the
Corrective Action procedures. Where approved plans are not, in the event, achieved, banks
be subjected to graduated responses depending on the seriousness of the failure. When
is threatened this will include mergers and acquisitions, P&A transactions or liquidation.
|Legislation will be submitted to amend the Financial
Institutions Restructuring Act, inter alia:
- to redefine a "distressed" institution so as to allow imposition of sanctions before actual
insolvency is reached; and
- to permit the full write down of shareholder equity.
|August 31, 1998
|Assessments of asset quality and managerial capacity by
internationally recognized accounting firms, signed by domestic and international partners. If
commercial bank's capital ratio is found to be below 8 percent as of end-June 1998 the FSC
proceed on a similar basis to that described above.
||September 30, 1998
|If the capital asset ratio of a bank which had been above 8
percent subsequently falls below 8 percent, the FSC will invoke the Prompt Corrective
|Korea First Bank|
and Seoul Bank
|Obtain bids for privatization
|Use of public funds for bank
|Public funds should only be used to the extent that is
to facilitate the liquidation of failed institutions and the restructuring of viable but weak
Specifically, restructuring which involves the use of public funds should be limited to:
- private sector recapitalizations and mergers approved by the FSC, where there is
adequate burden sharing, which would be expected to involve contributions of capital from
existing or new shareholders, and/or other stakeholders; or
- P&A transactions; or
- direct recapitalization by the government with full write down of shareholder capital and
replacement of management, in exceptional cases and where a bank is of systemic
|Government and KDIC funds can only be used, either to
capital directly (including contributions to cover the deficiency in net worth in P&A
transactions) or to purchase impaired assets through KAMCO.
- The bulk of asset purchases by KAMCO should be from commercial banks and
financial institutions where there is a deposit guarantee. In exceptional cases, asset purchase
be made from other institutions if failure of these institutions poses a systemic risk. Any such
purchases would be made in the context of a comprehensive restructuring plan for the
- Purchases should be at prices that reflect actual and expected recovery rates as well as the
opportunity cost of the funds employed for collateralized loans, and nominal prices for
- KAMCO's acquisitions and recovery performance should be subject to a half-yearly audit
international standards by a firm with international experience in the valuation of impaired
assets. The results of the reviews and any qualifications will be published. Any losses
will be reflected in KAMCO books within one month of the completion of the audit.
January 1, 1999
|Capital subscriptions from KDIC should be on terms that
provide the authorities with a share in any improvement in profitability and give the
powers, e.g., by the exercise of conversion rights, to take control in the event of a
- Provide for recapitalization of the IBK (W 1.5 trillion).
- Provide additional W 1.3 trillion in capital to KDB, KEXIM and IBK in the context of
August Supplementary Budget.
|Sign contracts for diagnostic reviews, including assessments
asset quality, as for commercial banks
||September 30, 1998
||Minimum capital ratios of 8 percent will be achieved by June
1999. All merchant banks will be encouraged to move progressively beyond the minimum 8
percent capital adequacy ratio after June, 1999.
||June 30, 1999|
|Prudential regulations and
|Type of measure
||The FSC will issue an implementation plan by August 15 to
bring Korea's prudential regulations closer to international best practice as expressed in the
Committee's Core Principles. Such a plan will cover:
- Deduction from Tier 2 Capital of all provisions except those in respect of all assets
classified as "normal" and "precautionary."
- Introduction of rules providing full disclosure to trust beneficiaries, and precluding any
possibility of payment by managing banks to make good or guarantee any loss:
(i) All trust accounts with guarantees will be regarded as on balance
for all supervisory and accounting purposes. For capital adequacy purposes, assets in such
accounts will be weighted at 50 percent from January 1, 1999, and 100 percent from January
(ii) Introduction of restrictive rules to be applied to all trust accounts
ensuring segregation for management as well as accounting purposes.
- Revision of loan classification procedures to incorporate the findings of diagnostic
and to ensure that classifications by managements, as well as reviews by examiners, fully
capacity to repay and not simply past performance.
January 1, 1999
January 1, 1999
January 1, 2000
January 1, 1999
|Prudential rules for|
liquidity and exposures
|Compliance with existing guidelines for commercial banks
require banks to have:
- short-term assets (less than 3 months) of at least 70 percent of short term liabilities;
- long term borrowing (more than 3 years) in excess of 50 percent of long term
|January 1, 1999
|Announce guidelines for merchant banks which will require
short-term assets exceed 50 percent of
short-term liabilities by end-December 1998,
60 percent by June 1999 and 70 percent by December 1999.|
Long-term borrowing will exceed 40 percent of long-term assets by June 1999 and 50 percent
|August 1, 1998
|Announce guidelines for merchant banks to apply the
maturity ladder approach.
||August 31, 1998
|Implement requirements for commercial and merchant
- Maintain internal liquidity control systems based on a maturity ladder approach;
- Report maturity mismatches for sight to 7 days; 7 days to 1 month; 1 to 3 months; 3 to 6
months; 6 months to 1 year; and over 1 year. (For commercial banks, reporting commenced
- Maintain positive mismatches for the first period. From sight to 1 month, any negative
mismatch should not exceed 10 percent of total foreign currency assets;
- Publicly disclose statistics on foreign currency liquidity.
The FSC will monitor implementation of internal liquidity controls on a monthly basis.
|January 1, 1999 (commercial banks) and|
July 1, 1999 (merchant banks)
- Introduce amendments to the Foreign Exchange Regulations to entrust all
for the setting of foreign exchange exposure limits, as well as the supervision of foreign
exchange risk, to the FSC.
- The BOK will provide regularly information it collects on foreign exchange positions to
- Introduce a new measurement system for foreign exchange exposures that recognizes
positions between foreign currencies, in calculating limits based on banks' capital.
|November 15, 1998
|Specialized and development banks|
|Issue regulations to extend, effective January 1, 1999,
rules applied to commercial banks to specialized and development banks taking into account
specific characteristics of the institutions.|
On the basis of their examinations at the delegation of MOFE, FSC will make
to MOFE as to any consequential remedial action required.
||The limit of 25 percent of equity capital for lending to large
shareholders and their affiliates, and other restrictions on connected lending, that apply to
commercial banks will be applied to merchant banks. The excess over the 25 percent limit
be progressively reduced by 20 percent by January 1, 1999, an additional 40 percent by
1, 2000, and eliminated by January 1, 2001.
||January 1, 1999
|All connected lending, and the terms on which it is provided,
will be audited and disclosed in the annual
||January 1, 1999
||For commercial banks, the government will submit
the National Assembly to amend the General Banking Act, to redefine single borrower and
exposure limits. The new definition will include all off-balance sheet exposures
- As from July 2000, both limits will be reduced from 45 percent to 25 percent of total
capital, using the new definition. The exposure to each borrower or group of borrowers in
of 45 percent outstanding at end-June 1998, will be reduced by 50 percent by end-June 1999
eliminated by end-June 2000.
- Exposures in excess of 25 percent at end-June 2000 will be subject to progressive
over the following four years, that is, one quarter of the excess over 25 percent will be
in each of the years ending end-June 2001, end-June 2002, and end-June 2003, with the
remaining excess eliminated by end-June 2004.
- In addition, the authorities will limit the aggregate of exposures (with the new definition)
excess of 10 percent of total capital to 500 percent.
- Banks with aggregate large exposures in excess of this limit as of December 31, 1998
set an interim benchmark of 800 percent by end-March 1999. Subsequent benchmarks will be
at forthcoming reviews.
|October 31, 1998
|For merchant banks, amending legislation will be
to the National Assembly to redefine large exposures to include all off-balance sheet
- The current limit of 100 percent will be reduced to 25 percent as of end-June 2000.
Exposures to borrowers or groups of borrowers in excess of 45 percent at end-June 1998,
will be reduced by 40 percent by end-June 1999, and eliminated by end-June 2000.
- Exposures in excess of 25 percent as of end-June 2000 will be subject to progressive
reduction over the following three years, that is, one third of the excess over 25 percent will be
reduced by end-June 2001, and two thirds by end-June 2002, with the excess eliminated by
- The aggregate of exposures in excess of 10 percent of total capital will be limited to 500
percent of total capital by end-June 2000. Merchant banks will be set interim benchmarks at
|October 31, 1998
|The aggregate excess exposure for each commercial
and for each merchant bank, will be published quarterly, as from end-December 1998.
||Upon completion of the unification of supervisory
- Enhance consolidated supervision to encompass the full range of banking risks,
including foreign exchange risk, whether carried on in the principal bank or its foreign
and domestic affiliates and subsidiaries; and
- extend the supervisory arrangements for commercial banks to all nonbank financial
institutions, including merchant banks, securities companies, and investment trust companies
January 1, 1999
January 1, 1999
|The MOFE, the FSC, and the relevant regulatory bodies
work to improve disclosure, auditing, and accounting standards. These steps involve:
- Introducing regulations that will ensure that accounting standards for financial
institutions fully comply with the minimum requirements of IAS 30.
- Reviewing regulation of the auditing profession to ensure that auditing standards reflect
international best practices.
- Improving reporting requirements for banks, in order to strengthen the ability of
to be forewarned of potential problems.
- Ensuring that published financial statements, including off-balance sheet positions, are
in line with international standards of disclosure.
|Capital Market Development and Trade
and Capital Account
|Type of Measure
- Submit legislation to the National Assembly to allow for the creation of mutual
- Submit legislation to allow the issuance of asset-backed securities.
|August 31, 1998|
August 31, 1998
- Remove restrictions on voting rights of institutional
investors (Investment Trust Companies and trust account of banks).
|August 31, 1998
||Phase out Import Diversification Program (presently
items) (committed to WTO by end-1999):|
- Liberalization of additional 32 items; and
- Liberalization of remaining items.
|Review existing import certification procedures and present a
plan to streamline them and bring them in line with international practice.
||August 15, 1998
|Review all existing subsidy programs and their economic
rationale. Present a proposal for rationalizing existing subsidy programs.
||November 15, 1998
||Permit foreigners to engage in deep sea foreign freight
Increase foreign ownership ceilings on:
- publishing of newspapers (to up to 33 percent);
- publishing of periodicals (to up to 50 percent).
|January 1, 1999|
January 1, 1999
January 1, 1999
|Six capital account liberalization measures
initially envisaged to be completed by December 31, 1998 have been completed ahead of
schedule. Remaining measures are:
- Review Foreign Exchange Law, in consultation with the IMF, and submit legislation
amend the law to accelerate liberalization of foreign exchange transactions, including
the regulatory framework to a negative list system.
|Transparency, Monitoring, and Data
|Type of Measure
- The BOK and the MOFE will record all public support for financial sector
on a transparent basis, including by KAMCO and KDIC.
- Develop a set of indicators to monitor the soundness of the financial system,
regular reporting of such data to the IMF.
- Continue developing the external debt reporting system to enhance debt
- Develop external vulnerability indicators as an "early warning system."
- Introduce improvements to the reporting of off-balance sheet foreign currency
exposure of financial institutions.
- Submit the necessary legislation to ensure compliance with reporting on external
the corporate sector.
October 31, 1998;
(Done July 1998)
September 30, 1998
- Data on usable reserves of the BOK will be published twice monthly (for 15th and
last day of each month) within five business days. Data on net forward position of the BOK is
being published monthly. All of these data will be placed on the BOK Web site.
|Started May 15, 1998
July 23, 1998
Memorandum of Understanding
Agreement was reached today between the Government of Korea and the World Bank on a
corporate restructuring program as set out in the attached policy matrix. The Government of
Korea expresses its firm commitment to implement the corporate restructuring program
effectively and in accordance with the timetable indicated in the attached agreed policy
This program will be included in the overall policy matrix for the Structural Adjustment Loan
to be negotiated between the Government of Korea and the World Bank.
On behalf of the Republic of Korea
Mr. Kim Woo-Suk
On behalf of the World Bank
World Bank SAL II
Policy Matrix on Corporate Restructuring
* = Completed
** = In process
|1. Develop framework and
to do voluntary corporate workouts
|a) Provide an overall framework of principles and
||FSC provides guidelines on the following:|
—selection of corporate restructuring candidates;
—a Corporate Restructuring Agreement ("Agreement") to provide a structure for
—creation and operation of a Corporate Restructuring Coordination Committee
("Coordination Committee") to resolve inter-creditor disputes; and
—"London rules" type principles to guide voluntary corporate workouts (July).*
FSC to monitor workouts under Agreement to ensure consistency with the issued guidelines
Continued monitoring of the implementation of the framework and guidelines.
|b) Assign responsibility for leading voluntary corporate
||FSC identifies Lead Banks (July).*
|c) Gain creditor support for approach to voluntary
||FSC obtains adherence of major creditors to
Corporate Restructuring Agreement (July).*|
|d) Provide necessary professional resources for Lead
||Lead Banks to establish workout units (July).*|
Lead Banks to retain internationally accredited advisors by September 15.
|e) Provide means to resolve inter-creditor disputes.|
|Facilitated by FSC, banks to establish a Coordination
Coordination Committee to hire staff by August 15 and, as necessary, retain internationally
|2. Provide policy support for corporate
|a) Curtail emergency loans.
||While financial institutions may provide new or additional
distressed but viable corporates as part of a Corporate Restructuring Agreement workout,
will provide guidelines for such lending by August 15. These guidelines would include the
—GOK will refrain from directing the
banks to make such loans;
—the size of any loan would normally be limited to the shortfall needed to meet interest
expense and trade payables during the "standstill" period;
—in return, the debtor would facilitate complete access by the Lead Bank's financial
advisors (e.g., auditors) to the debtor's records;
—during the standstill period, the Lead Bank's financial advisors would assess the
viability, review the debtor's liabilities and cash flow projections, and —as appropriate
—value assets and indicate how best to maximize the return to creditors —i.e.,
voluntary workout, composition, reorganization, or liquidation.
In exceptional cases, debtors due to be restructured, but not currently in the workout process,
require new loans. In such cases, if the banks are agreeable to providing such loans they will
provided per the guidelines noted above and for a maximum initial period of six months.
|Monitor observance of the guidelines.
|b) Facilitate use of debt/equity conversions to address
excessive leverage among chaebol affiliates.|
|GOK will review if there are any tax disincentives and
impediments to the conversion of corporate debt into equity or near equity and will submit
legislation to National Assembly as necessary (September 15).|
GOK will submit legislation to National Assembly on mutual funds (August 30).
FSC will meet with experienced asset managers, corporate turnaround experts, and investors
distressed securities from the private sector to assess options for "corporate restructuring
vehicles" (CRVs). Privately financed and managed, CRVs would purchase and/or manage
corporate equity acquired by financial institutions as a result of debt/equity conversions. Key
issues for FSC to discuss with potential CRV managers would include appropriate business
forms for CRVs (e.g., partnerships, blind trusts, stock funds) and potential tax, legal, and
regulatory issues (August).
GOK will identify legal, tax, and regulatory impediments—if any—to the
establishment of CRVs
Based on this review, and if necessary, GOK will submit legislation to the National Assembly
enabling and regulating the formation of CRVs and removing tax, legal, and regulatory
impediments to CRV formation and operation (December 15).
|c) Reduce cross guarantees.
||FSC will encourage creditors to reduce cross guarantees
voluntary workouts conducted under the Corporate Restructuring Agreement (August).|
FSC will issue a communication to banks suggesting market-based approaches for "buying
cross guarantees. These approaches could include, for example, conversion of cross
into guarantor's equity or equity warrants or into a non-guaranteed loan at a higher interest
FSC will require financial institutions to report on the stock of guaranteed loans to the 64
chaebol as of June 30, 1998, by September 15; and ,starting with the fourth quarter of
1998, FSC will require quarterly progress reports from banks on progress in reducing cross
guarantees for the 64 chaebol (August 15).
FSC will establish appropriate internal interim benchmarks to monitor progress toward the
reduction of cross guarantees (October).
|d) Provide additional encouragement for corporate mergers
and acquisitions, debt restructuring, and asset dispositions as means of corporate
||GOK to submit to National Assembly proposed package of tax
measures to encourage corporate M&As, asset sales and debt restructuring (September
||GOK will submit additional legislation to National Assembly
removing tax disincentives to corporate M&As, asset disposals, and debt restructuring
|e) Improve procedures and coordination for
||GOK will establish a Task Force under TORs acceptable to the
Bank to review existing insolvency laws for further improvement, focusing on expedited
procedures (e.g., pre-packaged bankruptcies resulting from the workout process) (September
FSC and MOJ, subject to agreement with the Supreme Court, will establish a liaison
comprising these three entities to ensure prompt resolution of issues that affect both voluntary
restructuring and court-supervised insolvency (September 15).
|MOJ will agree to announce, based on the review, its draft
amendments to existing insolvency laws designed to promote expedited insolvency
for public hearing and subsequent submission to the National Assembly by February 1999
|3. Accelerate implementation of
|a) Complete "triage" analysis.
||Lead Banks will complete their assessment of chaebol
affiliates (including those from the top 5) that have received "anti-bankruptcy" loans or
which are on bank "watch" lists and will indicate whether each is best suited for court
supervision, voluntary workout under the Corporate Restructuring Agreement, or normal
A special Task Force has been convened amongst four of the Lead Banks to focus on a
for monitoring the top five chaebol. The Task Force will also examine the workout
programs of the top five chaebol. The Task Force will complete its assessment by
|b) Pursue inter-creditor agreements, under the Business
Restructuring Agreement, on corporates to be restructured.
||First Creditors Council meetings will be convened by each of
Lead Banks under terms of the Agreement (July/August).**|
FSC will direct each Lead Bank to provide monthly reports on the status of corporate
FSC will direct the Coordination Committee to provide monthly reports to FSC on
disputes and their resolution (October).
|c) Pursue a timely exit strategy for the 55
||FSC will direct Lead Banks to stop new lending and withdraw
existing loans for each of the 55 (July).
||Lead Banks to provide monthly reports to
FSC on progress in exiting the 55.
|d) Identify additional non-viable corporates.
||FSC will require monthly updates from Lead Banks on
corporates identified as non-viable during the course of Corporate Restructuring Agreement
|e) Initiate resolution of corporates that are not under
supervision, but which have received emergency loans.
||FSC will direct Lead Banks to send auditors into
affiliates that have received emergency loans—but which are not operating under court
supervision—and give the auditors 60 days to review corporate liabilities, cash flow
and asset values, assess viability, and indicate how to maximize the return to
through voluntary workout, composition, reorganization, or bankruptcy (August).
|f) Expedite resolution of corporates under court
which the GOK is a major shareholder.
||KDB will invite international bids under transparent and fair
procedures for Kia (July). KFB will invite such bids for Hanbo by September.
||Monitor next steps.
|g) Develop an ability to anticipate corporate default or
||FSC will establish a "situation room" to monitor
corporate/financial sector solvency (July).*|
|h) Promote self-restructuring by the top 5 chaebol.
||FSC will provide guidelines to Lead Banks to strengthen the
"capital structure improvement plans" of the top 5 chaebol, including decreases in
debt/equity ratios, disposal of non-viable affiliates, and reductions in cross guarantees
Fair Trade Commission will monitor and take actions against the top 5 chaebol that
engage in anti-competitive intra-group transactions (July).
|Monitor implementation of the guidelines.|
Continued monitoring and enforcement.
Structural Performance Criteria
March 31, 1998
1. Complete second-round evaluation of the remaining 20 merchant banks and suspend
operations of those banks which fail to pass the evaluation. Completed February 26,
2. Allow foreign banks and brokerage houses to establish subsidiaries. Came into effect
March 31, 1998.
June 30, 1998
1. Complete assessment of the recapitalization plans of commercial banks. Completed
2. Establish a unit for bank restructuring under the FSC with adequate powers and resources
coordinate and monitor bank restructuring and the provision of public funds. Unit
on April 1, 1998.
September 30, 1998
1. Submit legislation to allow for the creation of mutual funds (by August 31, 1998).
2. Require listed companies to publish half yearly financial statements prepared and reviewed
external auditors in accordance with international standards (by August 31, 1998).
December 31, 1998
1. Obtain bids for Korea First Bank and Seoul Bank (by November 15, 1998).
2. Introduce consolidated foreign exchange exposure limits for banks, including their
branches (by November 15, 1998).
|Outstanding Stock as of:
(In billions of won)
|Net domestic assets
| End-June 1998
| End-September 19982
| End-December 19982
| End-June 1998
under the program
| End-September 19983
| End-December 19983
|1With net foreign assets valued at
program exchange rates.|
Net domestic assets (NDA) is defined as the difference between reserve money and the won
equivalent (converted at the program exchange rate) of net international reserves (NIR) as
defined in the program. The NDA target will be adjusted down by the amount of any upward
adjustment to the NIR target, made necessary by an increase in the net forward position over
The ceiling on NDA and the indicative limit on reserve money will be increased (decreased)
any increase (decline) in required reserve ratios.
Net International Reserves of the Bank of Korea
(In billions of U.S. dollars)
| Performance criterion
For monitoring purposes, net international reserves (NIR) of the Bank of Korea (BOK) is
as the U.S. dollar value of gross foreign assets in foreign currencies minus gross foreign
Gross foreign assets will include all foreign currency denominated claims, including
gold, holdings of SDRs, and the reserve position in the Fund. Excluded from gross foreign
will be participation in international financial institutions, as well as holdings of
currencies, claims on residents, and deposits of the BOK at overseas branches and
Korean banks. Gross foreign liabilities are all foreign currency denominated liabilities of
contracted maturity up to and including one year plus the use of Fund credit. All assets and
liabilities will be valued at program exchange rates.
The net forward position is defined as the difference between the face value of foreign
denominated BOK off-balance sheet (forwards, swaps, options, and any futures market
claims on nonresidents and foreign currency obligations to both residents and nonresidents.
However, the amounts of swaps included in the definition will exclude swaps entered into
regard to any support provided as part of the second line of defense.
The floor on NIR will be adjusted upward for any increase in the net forward position over
end-June 1998 position of US$4.8 billion (including swaps of US$2.4 billion).
(In trillions of won)
|Cumulative deficit from January 1, 1998 through June 30,
| Estimated actual 2
||. . .
|Cumulative deficit from January 1, 1998 to:
| End-September 19981
| End-December 19981
2Second quarter outcome not known until August.
The consolidated central government overall deficit is defined as the consolidated balance of
central government (comprising the general account, the special accounts, and the special
budgetary funds) and the public enterprises special accounts.
The consolidated central government overall deficit will be measured through the
treasury accounts. It is defined as the change in the central government's deposits and treasury
cash with the BOK; plus the change in deposits with commercial banks and nonbank
institutions; plus the change in central government bonds outstanding; plus foreign borrowing