And Now, It's Korea

NOT MANY PEOPLE HAVE HEARD of Tong Yang, South Korea's biggest investment bank. But it wasn't very long ago that its hot-handed execs, like Kim Chong Dae, envisioned their firm as an Asian Merrill Lynch, a rising star on the international capital scene. Such hopes were routine in Korea in the '90s. Kim's countrymen saw their newly industrialized nation emerging from centuries of twilight as a plaything of empires, a ""hermit kingdom'' repeatedly invaded and colonized by Mongols, Chinese and Japanese. Only last year Korean papers proudly bannered the news as Seoul joined the Organization for Economic Cooperation and Development, the Paris-based rich nations' club. Per capita income surged past $10,000 for the first time, and the government confidently studied Bonn's absorption of East Germany as it prepared for the imminent collapse of its own cold-war alter ego, North Korea.

Now, once again, darkness seems to be closing around the hermit kingdom. And today, instead of Mongols, many Koreans fear that the International Monetary Fund is set to invade. Over the weekend Korea narrowly averted a collapse of its banking system when, as the latest victim of Asia's financial contagion, it asked the IMF for $20 billion in loans. That won't come close to covering Korea's problems: the government's short-term foreign debts may exceed its reserves by a stunning $40 billion to $50 billion, and nearly half of South Korea's listed companies are in financial distress. Just this year seven chaebol--Korea's giant conglomerates--announced that they are insolvent. And Tong Yang Merchant Bank has quietly slipped back into obscurity. ""A year ago foreign banks were so eager to lend money to us,'' says Kim Chong Dae. ""Now some of them don't even return our phone calls.'' His government has been in denial for weeks, but Kim, his face downcast, doesn't spare himself the truth. ""Asking for IMF help,'' he says, ""is like filing for national bankruptcy.''

For the Koreans, this may be the worst moment of national humiliation since the Japanese forcibly colonized their country nearly a century ago. On Saturday, in a speech to the nation, President Kim Young Sam apologized for his government's mismanagement, urging Koreans to ""share the pain.'' All the more mortifying was a rebuff by Tokyo, along with Washington, when Seoul sought at the last minute to avoid IMF help by asking for government-to- government loans. But the Japanese are in no condition to crow over their rival's misfortune: in Asia's neomercantilist game of competitive devaluation (chart), Japanese firms in key industries like steel and semiconductors will now be hurt by Korea's plunging won. And Japan's banks, already quaking under trillions of yen in bad debt, will take another hit from the inevitable slew of Korean bankruptcies.

But that wasn't all. Over the weekend, in a stunning development, one of Japan's four largest securities firms, Yamaichi, reportedly said it might declare bankruptcy, becoming the nation's largest corporate failure. That followed news that Prime Minister Ryutaro Hashimoto was considering using public funds for a banking-system bailout. While the Tokyo and Seoul markets jumped Friday, some see the Asian growth machine, which has been sputtering since June, threatening to grind to a complete halt.

So it's no surprise that, as this week began, investors' eyes worldwide were glued to a once obscure event: the annual Asia Pacific Economic Cooperation summit. Meeting in Vancouver, President Clinton and the leaders of 17 other Pacific Rim economies were expected to showcase a plan, agreed to in Manila last week, for Asia's rescue, including a new IMF line of credit. Market players are warily awaiting future financial collapses as far away as Brazil, and nervously eyeing the IMF's dwindling loan facility, already stretched by packages to Indonesia and Thailand. A few days earlier Korean Finance Minister Lim Chang Yuel engaged in a bit of economic brinksmanship as he warned that Korea's troubles were everybody's business: ""If Korea, the 11th largest economy in the world, is dragged into a predicament similar to that of Southeast Asia, it is very likely to set off more serious repercussions . . . on the entire world economy.''

There's no doubt that Asia's implosion is sending shock waves across world markets. Some pessimists see echoes of the Great Depression in the chain reaction of currency devaluations. Yet amid all this gloom many economists continue to talk hopefully. Unlike the globe-girdling economic collapses of the '30s, Asia's crisis remains largely contained. It may well prove ""salutary,'' to use Federal Reserve Chairman Alan Greenspan's term, since Asia's deflation will serve to counteract inflationary trends in the United States and Europe. And U.S. stocks remained remarkably resilient, with the Dow surging 309 points last week.

The longer-term outlook could be bright as well, some believe. Take trade. True, with much of the world in a state of simmering rebellion against globalization, the Clinton administration scrapped plans to push hard in Vancouver on Clinton's pet project, a Pacific Basin free-trade zone. But it almost doesn't matter. Why? Because a few months of brute market forces have probably done more than decades of trade talks to open Asia's economies. Last week's events may represent the worst blow yet to Asian neomercantilism--a system of closed economies and aggressive export promotion that worked while Japan and Korea were developing, but also led to huge overinvestment that is now haunting them in maturity. Prime Minister Hashimoto had already begun Japan's ""big bang''--the abrupt liberalization of its foreign exchange and financial sector--but now ""the markets have created a big bang across the region,'' says Robert Hormats, vice chairman of Goldman Sachs International. The IMF will further that process by pushing for deregulation, economic transparency and upgraded banking systems--key fixes for Asia' s problems.

The Korean rescue will likely amount to as much as $20 billion from the IMF and perhaps another $30 billion to $40 billion from governments, mainly the United States and Japan. Yet that's a sticky point. NEWSWEEK has learned that Japan is refusing to take a leadership role in committing money to Korea. ""I wish we could, but we have our own difficulties,'' says a senior Japanese official. Clinton, in turn, remains hamstrung by Congress's refusal to pay its IMF dues and is loath to dip back into the Economic Stabilization Fund used to rescue Mexico nearly three years ago. ""I don't think Congress is prepared for this,'' says Sen. Richard Lugar, Republican of Indiana. Neither is Korea. But both had better start getting ready.