South Korea To Take Harsh Medicine In Return For Bailout Unemployment Rate Expected To Double

South Korea and the International Monetary Fund put the finishing touches Wednesday on a rescue plan of at least $55 billion that is likely to double the nation’s unemployment and slam the brakes on economic growth to the slowest pace in 18 years.

The conditions attached to the bailout, the largest ever, also call for South Korea to liquidate or restructure banks, invite more foreign investment and products, slash government spending and raise taxes.

The harsh medicine is in return for bailout funds that will be largely used to reinforce the foreign currency reserves of the Bank of Korea, the country’s central bank. That will enable it to help South Korean companies refinance overseas loans. About $20 billion of foreign debt is due this month, and another $50 billion matures in 1998.

The rescue plan includes $21 billion from the IMF, $10 billion from the World Bank and $4 billion from the Asian Development Bank, plus backup credit lines of $10 billion from Japan, $5 billion from the United States, and lesser sums from Britain, France, Germany, Canada and Australia.

IMF Managing Director Michel Camdessus said the “far-reaching” reforms required as conditions of the bailout will help the South Korean economy recover. “I am confident this program will also contribute to the needed return of stability and growth in the region,” he said.

The contributions from individual countries are backup financing in case unanticipated events create the need for additional funds, Camdessus said.

The signing of an agreement after days of confusion reassured markets. After 10 consecutive daily losses that slashed the Seoul stock market value by nearly one-third, the benchmark Kospi index rose 0.7 percent to close Wednesday at 379 points.

The battered currency, the won, rose nearly 3 percent Wednesday. Late in the day the dollar was at 1166.2 won, down from an earlier high of 1300 won. The won is down 24 percent against the dollar since late October.

In early trading today , the Kospi index soared by 6 percent.

The largest previous international rescue package was the $50 billion bailout arranged for Mexico in 1995. Wednesday’s deal followed recent IMF-led bailouts of Thailand and Indonesia in recent months as a flood of currency devaluations, bank collapses and market crashes swept across Asia.

South Korea’s lame-duck president, Kim Young Sam Lim, said in a televised appeal to the Korean people: “We are expecting a higher unemployment rate as the economy slows … These pains and burdens are the cost our economy has inevitably to pay to revive and to recover our lowered credibility in the world financial society.”

Official approval of the package still awaits IMF board action in Washington. Full terms of the agreement are due to be formally announced only after that, but many details have already leaked out. They include:

Various economic belt-tightening measures that, in the estimate of IMF economists, would result in economic growth of 3 percent next year, compared with 6 percent this year and an average of 8.6 percent over the past two decades. That would be the slowest growth in 18 years, and is expected to lead to at least a doubling of unemployment.

Holding inflation to less than 5 percent.

Raising the limit of foreign ownership of stocks in South Korean companies to 50 percent from the current 26 percent almost immediately, with a further rise to 55 percent in 1998.