In an effort to restore stability, South Korea yesterday reluctantly adopted harsh economic reforms. But even as it bites the bullet, a critical US Congress is voicing increasing opposition to just this kind of bailout.
A key US lawmaker says the Clinton administration, by contributing to a record $55 billion international rescue package for Seoul, is exposing taxpayers to potentially astronomical costs.
"The US may be drawn into financial quicksand," Rep. Jim Saxton (R) of New Jersey, chairman of the Joint Economic Committee, said Tuesday. With international aid funds running low, US taxpayers could be sucked into providing a bigger share of more onerous bailouts, he says.
Representative Saxton's alarm comes even as financial chaos spreads beyond South Korea to shake the foundations of the world's No. 2 economy (Japan) and threaten markets in the United States.
Saxton's comments highlight the long-standing difficulty of the Clinton administration in winning congressional support for emergency aid under the International Monetary Fund (IMF).
The administration failed to secure such approval for its $20 billion contribution toward a $50 billion bailout of Mexico in 1995. Moreover, Congress last month failed to meet a $3.5 billion commitment to an IMF emergency fund.
Apparently with congressional opposition in mind, the administration has chosen to play a comparatively restrained role since the East Asia market tumult began in July. It abstained from an IMF bailout of Thailand and helped provide only a supplementary "second line" of capital for a $30 billion rescue of Indonesia in October.
Now, the administration is following that same tack with the South Korea bailout, providing just $5 billion in backup funds out of a total $55 billion.
And throughout the East Asian debacle, the administration has insisted it is not acting alone but with other states under a principle of burden sharing.
"The less these look like bailouts by the US, the easier it is for the White House to sell them to Congress," says Judith Lee, an international trade attorney at Gibson, Dunn, and Crutcher, a Washington law firm.
The administration also notes that Mexico repaid the United States for its aid in full, with interest. And it portrays the East Asia rescues as promoting US interests by bolstering major importers of American goods.
"If we deem it in our economic interests to participate in a rescue effort, we do so," White House spokesman Mike McCurry said on Monday.
However, by helping South Korea, the administration "raises the potential for significant US costs," says Saxton.
The danger, he says, is that other countries will believe that no matter how recklessly they act, if their economies fail the international community will bail them out, too.
And as commitments rise and IMF monies run low, Washington might find itself having to step up to replenish those funds in order to prevent international economic turmoil.
Saxton notes that a recent Congressional Research Service study says, "Loans made by the IMF during the current crisis are substantially cutting the level of the IMF's loanable resources and its liquidity ratio."
An IMF loan to South Korea of $20 billion will reduce the fund's liquidity ratio to its lowest level since 1982. This "is likely to limit [the IMF's] future ability to deal with the current crisis," says the service.
Experts in international finance note that, given sufficient backing from its members, the IMF can draw on huge financial resources. Japan alone proposed $100 billion for a regional fund for Asia.
But, the Mexican peso crisis showed Washington that it cannot always count on other states in a financial crisis. Other donors reneged on pledges of support; only the United States supplemented the $30 billion IMF loan.
Still, the United States now would abstain from collective IMF rescues only at great peril, say experts.
"We certainly have an interest in seeing these economies do well," says Bob Blecker, associate professor of economics at American University in Washington.
"If East Asia goes down the tube, then the United States - one of the few major economies with strong growth - will be pretty much alone in setting things right," he says.