SEOUL — In a market swept by International Monetary Fund bailout euphoria, South Korea's markets soared on investors' hopes that the nation's economic rehabilitation will be swift and that foreign banks would buy out its financial institutions.
But banking analysts said a takeover of South Korean financial institutions by foreigners was pie in the sky and the nation was headed for more turbulence, with no clear picture on short-term foreign debt and a string of corporate defaults in the offing.
Seoul's main stock index rose 6.74% after days of record falls. Brokers said the rally stemmed from eased fears that Seoul would be forced to declare a debt moratorium and the speedy disbursement of international loans announced on Christmas Eve.
In Japan, however, where investors raised new questions about that government's handling of its own shaky financial system, stock prices fell 3.3%, even as the financial minister declared his nation's crisis at an end.
What appeared to be bothering Tokyo investors most was the government's decision earlier this week to soften its banking reform plan. Specifically, the government backed away from its earlier plan to impose tough standards for the capital Japanese banks must have on hand relative to loans on their books.
But in South Korea the sharp turnaround was fueled by an agreement by the IMF and the Group of Seven countries early Thursday to provide South Korea with emergency loans by early January.
The Korean currency, the won, also closed up at 1,498 to the dollar, compared with 1,836 at Wednesday's close.
Friday was the first market activity since the announcement on the new international loans. The markets were closed Thursday for Christmas.
Korean investment funds traded on the New York Stock Exchange also gained ground Friday.
Hopeful signs also came from Tokyo, where 10 leading Japanese banks said they would seriously consider measures to maintain the liquidity of South Korean foreign reserves.
The Bank of England on Friday asked British banks to extend the length of their loans to South Korean banks. The request came as Britain and other G-7 nations said they will speed $8 billion worth of loans to South Korea to encourage foreign banks to roll over their loans to Korean borrowers.
French bankers are likely to roll over their loans, said Robert De Bruin of the French Bankers Assn. in Paris. "French banks are strong in Korea and don't want to lose this position," he said. "They are there for the long term and don't see any point in pulling the rug out from under Korea by cutting credit right now."
By putting pressure on commercial banks to roll over loans, G-7 members hope to deflect criticism that aid for South Korea enables some foreign banks to recall loans that might otherwise turn sour. In recent weeks, South Korea's central bank used loans arranged by the IMF to help Korean commercial banks repay foreign currency debt.
South Korea's financial institutions owe more than $10 billion that matures by Dec. 31. In January and February, another $18 billion comes due.
The accelerated rescue funds--$2 billion from the IMF and $8 billion from the U.S., Japan and five other nations--were in exchange for South Korea's promise to speed up reforms of its inefficient financial markets and open wider its car and other industrial markets to foreigners.
The promised reforms include liquidation of insolvent banks and finance companies ahead of schedule and wider foreign access to the country's lucrative bond markets.
South Korea on Friday announced financial restructuring measures, such as cutting staff at troubled financial institutions to make mergers and acquisitions easier.
The Finance Ministry said it would issue clear guidelines governing foreign investment in domestic financial institutions in January.
It also said the government would assume control of Korea First Bank and Seoulbank and remove the management responsible for their losses by Feb. 25.
The ministry said it would submit legislation by the end of February that would allow supervisory authorities to close insolvent institutions.
Investors took the measures as a cue to buy shares in the financial sector. All but three commercial bank stocks hit their daily limit high.
"South Koreans are M&A frantic," said Kim Chul-jung, a banking analyst at Ssangyong Investment Securities. "Any time there is talk that a foreign institution will take over, local investors buy."
Seoulbank and Korea First Bank, which had risen to their upper limits Monday on rumors they would be taken over by foreign banks, plunged to their limit lows Friday after Citicorp said this week it had no interest in buying Korean banks, brokers said.
"Bank shares will be volatile for a while," said an analyst with a foreign brokerage house. "The financial stocks will move in line with the foreign exchange market.
"The investments are extremely speculative and not based on fundamentals of the companies. The financial sector is heading for a storm as many companies will default because the IMF agreement bans bailouts by the government," said the analyst, who asked for anonymity.