Big S. Korean loan scandal puts Chun on spot

A multimillion dollar private loan scandal which has brought about the collapse of the entire Cabinet has sent financial and political tremors through South Korea.

At stake now is the credibility of President Chun Doo Hwan's government.

The financial scandal caused panic in domestic financial circles, a run on the stock exchange, near-bankruptcy for several companies, and virtual paralysis of the private lending market which, for thousands of Korean companies, is the only source of loans and short-term financing.

As a result of the scandal President Chun's entire Cabinet tendered their resignations, ''assuming moral and political responsibility for a series of incidents over the past two months.''

President Chun has accepted the resignation of eleven ministers, but retains Prime Minister Yoo Chang Soon and 10 other ministers.

The loan scandal -- which surfaced when investigations were made into the dealings of a husband and wife moneylending team on the private loan market -- has resulted in the arrest of 19 people, including a close relative of President Chun's wife and the heads of two major Korean banks. Some bankers estimate that the private loan market represents 40-50 percent of the total money in circulation here.

The moneylenders, an influential businesswoman, Mrs. Chang Yong Ja, and her third husband, Mr. Lee Chol Hi, a former parliamentarian and ex-deputy director of the Korean Central Intelligence Agency,

were found to have obtained nearly $1 billion through circulating promissory notes as collateral for loans from Korean companies, and to have discounted the majority of these through other private moneylenders. Panic and financial trouble started soon after banks refused to honor some of the notes.

The furor increased and the scandal came closer to the presidency when Mrs. Chang's brother-in-law, Lee Kyu Kwang, who is also the first lady's uncle, was arrested. The prosecutor-general, after a three-week investigation into the affair, has accused Lee Kyu Kwang of accepting a $138,000 bribe from Mrs. Chang in exchange for his influence with government officials in trying to set up Korean joint ventures with the National Commercial Bank of Saudi Arabia and the Riyadh Bank.

The prosecution has also said that Lee allowed Mrs. Chang to use his name and their relationship to give the impression that he backed her financial dealings.

It is normal practice in Korea for those in positions of responsibility to resign if anything goes wrong -- even if they are not personally involved or to blame.

President Chun deviates somewhat from tradition by retaining Prime Minister Yoo and, contrary to general expectation, his deputy premier and economic planning minister, Kim Joon Sung, and Finance Minister Rah Woong Bae.

A presidential spokesman said Mr. Chun thought both Kim and Rah should take responsibility for the loan scandal, but felt it would be better for them to remain and help sort out the crisis.

The two ministers are considered part of the ''technocrat element'' brought into the government by Chun to tackle the country's economic problems of recent years.

The immediate task facing the government is to make loans available to companies that would otherwise go bankrupt because of the unofficial loan market crash.

One financial observer commented: ''This scandal has shown, what everyone already knew, that the highly controlled official banking system in Korea is inadequate to meet the demands of short-term capital for the companies in this nearly-developed economy.''

From the political aspect, the scandal has caused some irreparable damage, even though Prosecutor-General Chung says no politicians in power have been directly implicated.

Combating corruption has been a major policy of President Chun's government. In a bid to rid Korean society of its corrupt elements, thousands of people have been dismissed from their jobs, sent to ''purification'' or ''re-education'' camps, or even to prison.

Yet in spite of the purges, massive corruption at a high level - even linked to the President's family -- has been going on under the very nose of this ''clean government,'' in what is being described here as ''the worst corruption case in South Korea's history.''