S. Koreans Get Reprieve on Loans by Big Banks

NEW YORK — Major international banks, scrambling to contain South Korea’s spreading economic crisis, agreed Monday to give Seoul some financial breathing room by pushing back the due dates on billions of dollars’ worth of loans coming due in the next few weeks.

The agreement within the high-powered banking fraternity came on the heels of the enactment of major, if belated, financial reforms by South Korea’s parliament as the world’s 11th-largest economy bowed to pressure from abroad.

Taken together, the steps appeared to temporarily defuse the urgency of South Korea’s fiscal situation.

The agreement by North American, European and Japanese commercial bankers--reported by sources involved in the bankers’ meetings here--forestalls the threat of massive defaults on private South Korean debt held by foreign lenders. And Seoul’s reform legislation satisfies key demands made by the International Monetary Fund in return for its $60-billion bailout.

Details on how much debt was being rolled over and for how long were not revealed.

The banking agreement came amid heavy prodding by the U.S. government and the central banks of other economic superpowers.

“The central banks have been explaining in blunt terms where our self-interest lies,” said a commercial banker involved in the proceedings.

The arm-twisting is meant to ensure that the flow of private bank lending continues while South Korea struggles to right itself economically. But while the commercial banks agreed to maintain their lending at roughly current levels, they did not promise to reschedule all loans to all borrowers. They could maintain or even expand their lending to good customers but shut off credit to risky ones.

“It’s very important to us to keep the freedom to choose our customers,” said one of the participating bankers.

South Korean companies owe as much as $200 billion to foreign lenders, and by one estimate $28 billion of that total falls due by the end of February. Their situation is similar to that of a homeowner facing a mortgage payment due on the first of the month who doesn’t have the money to pay it.

South Korea’s economy has been ravaged by a chain reaction of corporate bankruptcies that have rippled through the financial system. The nation’s currency, the won, has plunged by nearly half against the dollar this year, and stocks have been hovering near 10-year lows.

Lawrence Summers, deputy U.S. Treasury secretary, said in Washington that the banks’ agreement reflected awareness of “the importance of financial institutions taking responsibility with respect to Korea’s financial problems.”

In Seoul on Monday, the parliament overcame earlier resistance and passed a 19-bill package that includes steps to strengthen supervision of the financial industry and requires companies to disclose more financial data.

Failure to pass a similar package in mid-November was one of the key events that finally forced Seoul to turn to the IMF for a bailout.

The most controversial part of the reform package combines supervisory authority over the banking, securities and insurance industries into one watchdog agency that will be placed under the prime minister’s office.

This new quasi-independent nine-member financial supervisory board, to be created by April 1, will include four government officials.

Another bill gave South Korea’s central bank more authority over monetary policy but took away its supervision of the banking system.

The parliament also eliminated a 55% ceiling on foreign ownership of South Korean stocks effective April 1.

Monday’s New York meetings amounted to a gathering of who’s who in international banking. The sessions were held at the Federal Reserve Bank of New York and at the Wall Street headquarters of J.P. Morgan & Co.

Besides Morgan, the big commercial banks represented included Citibank, Chase Manhattan, Bank of America, France’s Societe Generale, Bank of Tokyo-Mitsubishi, Deutsche Bank, Bank of Montreal, Royal Bank of Canada, Banca Commerciale Italiana and Swiss Bank Corp.

“What they’re trying to do is to make sure all the players agree they’re all staying in,” Stephen Taran, credit research manager at Lehman Bros. in Hong Kong, told Bloomberg News. “They all need to know they’re not the last guy lending.”

Estimates of South Korea’s total foreign debt range from $130 billion to $200 billion. Its foreign reserves are enough to cover only a few weeks of repayments, although more funds will be available from the IMF package in the next few months.

The IMF, U.S., Japan and 11 other countries said last week that they will provide accelerated payments of $10 billion to South Korea from the IMF-led package, partly to encourage private banks to roll over more loans.

Meanwhile, as many as 80 German banks were reported to have already agreed to roll over some of their short-term loans to South Korean companies for 30 days.

Some of Wall Street’s biggest investment banks also agreed to ease credit terms with South Korean firms.

Merrill Lynch & Co., Salomon Smith Barney Holdings Inc., Goldman Sachs & Co., Dean Witter, Discover & Co. and Lehman Bros. Inc. pledged “to participate in the program of support to Korea.”

Mulligan reported from New York and Holley from Seoul. Times staff writer Art Pine in Washington contributed to this story.