Korean Banks Seen Facing Cash Crunch

South Korean banks could face a severe cash shortfall and possible default at the end of this month if Seoul sticks to IMF conditions and restrains liquidity in the money market, bankers in Tokyo said yesterday.

Monetary sources said that under South Koreas IMF-led bailout package, Seoul had agreed in principle to reduce money market cash liquidity to no more than 25 trillion won by the market close on December 31.

If Seoul strictly meets this IMF conditionality...some banks will have to face a de facto default in the market, said a banker at a major Japanese bank.

If the conditions were met, South Korean monetary authorities may be forced to suspend business at banks unable to raise the necessary funds for two to three months from December 31, bankers said. The possible liquidation or closure of debt-laden banks might not occur, however, until the new administration is formally installed in Seoul, they said.

South Koreas president-elect Kim Dae-Jung officially takes office on February 25.

The bankers also said that yesterdays agreement to disburse a further $10 billion from South Koreas IMF bailout plan by early January would provide little relief for cash-strapped Korean banks. This was because the money was expected to be used mostly for the repayment of foreign borrowing, they said. The bankers said South Koreas foreign debt obligations falling due between January 1 and January 10 were believed to total as much as $10 billion.They said South Koreas central bank settlement system had recently been operating until midnight every day to cope with banks fund-raising demand.

Bank of Korea governor Lee Kyung-shick arrived in Tokyo on Tuesday for a three-day visit and met top officials from Tokyos biggest banks in an apparent bid to encourage the rolling over of loans to S Korean financial institutions.

Donor nations to the countrys record IMF-led bailout package of nearly $60 billion have promised $8 billion by early January while the IMF plans another $2 billion disbursement to Seoul on January 8, in addition to the $2 billion it expects to make available on December 30.