IMF Christmas `gift' gives South Korean market breathing space

South Korea's battered markets have surged as the country toasted a $10 billion Christmas reprieve, but the mood sobered as investors counted the cost. Stock prices surged 7 per cent on the opening bell yesterday and the won traded at 1,400 to the dollar, an almost 24 per cent rise.

But by the close of the day, the market index's gain had eased to 6.7 per cent and the won retreated to 1,498 to the greenback.

Dealers said the IMF-backed emergency package salvaged Seoul's near-default external payments position. But the strings attached and the depths to which the economy had already sunk augured only more bankruptcies at home.

"I'm sure everyone was praying for this country on Christmas Eve, and Santa delivered our biggest present - $10 billion," said Mr Lee Jong-Chan at a local securities office.

"Today was the first day of trading after the announcement and the news brightened the market and investors' hopes for recovery," he said.

But, said Shinyoung Securities analyst Mr Cho SungMin, "the situation in the money markets will get tougher and lead to more insolvencies". Mr Cho pointed out that the gainers leading yesterday's rebound were in stocks of ailing firms ripe for takeover by foreigners under concessions made by the government to the International Monetary Fund (IMF).

"It is too early to predict now," said a another local dealer at a bank in Seoul on whether the financial markets could sustain their recovery.

An analyst at US research house Standard and Poor's MMS in Singapore agreed that it was too early to believe South Korea was out of trouble. "I think it is certainly premature to say they are out of the woods but at least the crisis mood will calm down a bit from the panic that prevailed at the beginning of the week," said Mr David Cohen. At midnight on Christmas Eve, the IMF and the world's major industrialised countries agreed to rush $10 billion to Seoul to meet the avalanche of maturing short-term debts that had threatened to swamp the country.

Two billion dollars is expected to arrive next week, and $8 billion in early January.

In exchange, South Korea conceded, in writing, to a sweeping IMF-demanded financial restructuring including the complete opening of the country's bond market and allowing foreign banks and brokerage houses to set up branches in the country.

Yesterday foreign banks and business firms were already sniffing around in earnest, with their eyes reportedly on floundering financial firms including banks, securities houses and insurance firms.

Market sources said that US banks may seek to buy one of two ailing commercial banks - Korea First Bank and Seoulbank - while US and European securities firms wanted to take over local securities houses. Troubled distribution and pharmaceutical companies, hit by slow business and high import prices caused by the weak won, have also become primary targets for mergers and acquisitions, analysts said.

US carmaker General Motors and Bosch of Germany are also interested in buying into the troubled Mando Machinery Co, South Korea's largest auto parts maker, they said. In line with the agreement with the IMF, South Korea yesterday decided to allow layoffs at finance sector firms early next year instead of the originally planned 1999. The decision, expected to make ailing local banks more attractive to foreign buyers, was reached at a meeting of the powerful 12-member economic task force overnight, a member of the team said.