This mess took weeks to unwind. Rubin's task forces worked virtually around the clock, and the IMF assembled a financial-support package of $55 billion?its largest financial rescue ever. The deal required the cooperation of Kim Dae Jung, Korea's newly elected president, whose first major decision was to commit to stringent economic reforms. Part of the challenge for the Treasury and the Fed, meanwhile, was to talk scores of the world's largest banks into not calling in their Korea loans. All these initiatives came to a head at the same time, prompting Bob to say in retrospect, "We must have set some kind of record for disturbing the slumber of finance ministers and central bankers all over the world."
There was always the chance that a rescue this large would set a bad precedent: how many more times would investors pour money into willing but shaky economies, figuring that if they got into big enough trouble, the IMF would bail them out? This was a version of what the insurance industry calls the "moral hazard" of protecting individuals from risk. The bigger the safety net, the theory goes, the greater the recklessness with which people, businesses, or governments will tend to behave.
Yet the consequences of allowing South Korea to default would have been worse, possibly far worse. A default by a nation of Korea's size would almost certainly have destabilized global markets. Major banks in Japan and elsewhere would likely have failed, sending additional tremors through the system. Shell-shocked investors would have withdrawn not just from East Asia but from Latin America and other emerging regions, causing develop- ment to stall. Credit would very likely have become much tighter in the industrialized nations as well. And that is leaving aside the military risk unique to South Korea's situation. For their handling of that crisis alone; Bob Rubin and Larry Summers belong in the finance ministers' hall of fame.
