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The common wisdom among Pyongyang watchers is that responsibility for North Korea’s failure, up to now, to clear its foreign debt is entirely the country’s own. London businessman Colin McAskill has a different view.
During 1987, while overseeing North Korea’s bullion trade, McAskill made two attempts to negotiate a restructuring of the country’s defaulted London Club (non-sovereign) debt. Both failed. Rather than placing the onus entirely on the North Koreans, he assigns much of the blame to moves by a banking syndicate led by the London office of Melbourne-based ANZ Bank.
He got involved after receiving a mandate from the chairman of Korea Daesong Group and Korea Daesong Bank to meet with Morgan Polton, an ANZ Bank department head representing two bank lenders’ syndicates: ANZ’s own, and another led by merchant bank Morgan Grenfell. Asia Times has learned that Polton died in 2015.
Richard Halcrow was a Morgan Grenfell director who eventually took over from Polton as McAskill’s counterpart in the negotiations. He stayed on for a time with Morgan Grenfell after it had been acquired by Deutsche Bank, before resigning in 1997. Attempts to reach Halcrow for comment have been unsuccessful.
At the outset, McAskill says, “the main negotiations were started with ANZ directly with Polton and his team. Occasionally Halcrow and his team would join when we reached a point of contention.”
The debts to be restructured were in Deutsche marks and Swiss francs, McAskill says. “They were almost entirely commercial paper from failed letters of credit and so on.
“Many of the original lenders of record were in both ANZ and Morgan Grenfell syndicates. My concern was always the mishmash of currencies and types of debt, especially in the ANZ syndicate because they were running a date-related priority queue,” McAskill explains.
“My overriding condition was that whoever the creditor was or whatever currency the debt was in, the total sum had to include interest and penalty interest, which was then to be converted to US dollars. The interest and penalty-interest structures seemed to have differed between ANZ and Morgan Grenfell.”
Further complicating the task, the original borrower was Pyongyang’s Foreign Trade Bank – which was “virtually bust,” McAskill says. Korea Daesong Bank took over for the North Korea side.
“All of the country’s main trade was now being conducted by Korea Daesong Group and Korea Daesong Bank – and the main income was being generated in US dollars from the bullion sales, which were to be my main source of repayment.”
McAskill proposed that Polton and Halcrow “pool the debt into one parcel to quantify principal, interest and penalty-interest. When the total amount outstanding was quantified it would be converted into US dollars. The amount we finally agreed upon to be converted came to $900 million. The debt was always listed as London Club,” he says – never as Paris Club, which refers to sovereign debt.
“In the first proposal, I suggested the repayment schedule of the full $900 million would be spread over 25 years. Polton insisted there had to be a huge up-front payment based on the original Deutsche mark and Swiss franc values,” says McAskill.
“When we had agreed to the total amount owed and the settlement terms, the London banking syndicates agreed to grant Korean Daesong Bank a new loan in US dollars, subscribed to pro-rata by all syndicate members, and the proceeds of the loan were to be used exclusively to settle the old debt in full,” he adds.
“The idea was to get rid of the old loan parcels with a totally new package, government guaranteed, and establish Korea Daesong Bank as the new borrower to try and get rid of their bad reputation. The Daesong chairman knew that they could never borrow in the market unless that was done. I told him as much.
“When word got out that we had a deal,” McAskill says, “several independent holders applied to join in the settlement arrangement through either of the syndicates.” Among them, he recalls a large Japanese creditor and other smaller European creditors.
A “heads of agreement” document “was drafted by me to be signed by ANZ, Morgan Grenfell and a senior North Korean official, and witnessed by me,” McAskill says.
“At the meeting to present the HOA to ANZ I was unequivocally told, ‘If you get the North Koreans to sign that, we’ll sign it and we’ll buy you dinner anywhere you choose.’ The official from Pyongyang was already in Vienna. I then went to meet him and, after studying the HOA, he signed and officially sealed it without any changes.”
McAskill returned to London, met with the ANZ and Morgan Grenfell representatives and presented the signed document to them. “They were dumbfounded,” he recalls. Apparently, they had anticipated that the North Koreans “would balk at the huge amount of interest and penalty-interest added to the actual debt.”
McAskill then reminded them of their dinner invitation. “Asked where I would like to dine, quick as a flash I said, ‘The Four Seasons in New York – you did say anywhere of my choice.’ After seeing I had the advantage, I changed it to the Grill Room at the Connaught Hotel, where they did me proud!”
Things soon fell apart.
“ANZ took more than three months to prepare the final restructuring papers and arrange a signing meeting in Vienna,” McAskill says. “Pending the formal signing, Korea Daesong Bank would not be formally committed to the deal.”
At a pre-signing reception, held at the North Korean embassy in Vienna, “the head of the North Korean delegation said to the head of ANZ that he was pleased with the result of the settlement. However, because of the time it had taken for the documentation to be presented, the Deutsche mark and Swiss franc exchange rates had moved against the North Koreans,” McAskill recalls
“While it did not change the overall amount stipulated in the HOA, it did change considerably the down payment, which was to be in US dollars.”
That amounted to a hefty sum: an extra $12 million. The ANZ official “said not to worry – they would deal with that at the signing meeting the next day.”
The Pyongyang delegation head was senior to the North Koreans with whom McAskill had been accustomed to dealing. The newcomer represented what many foreigners who have done business with North Korea would describe as the traditional Pyongyang attitude: Agreements with outsiders are meant to be broken.
“That meeting in a meeting room provided by the Austrian central bank turned into a total farce,” McAskill says. “The North Korean opening question was about the down payment. ANZ said, in my hearing, ‘How much would you like to pay?’ The North Korean took that as a pretext for him to completely renegotiate the entire agreement,” McAskill says.
The North Koreans also decided they no longer needed McAskill. “I addressed ANZ in the chair and said, ‘My work here is done. You have an agreement signed by both sides, witnessed by me, and I would now like to withdraw and return to London.’”
McAskill departed. He was subsequently told by ANZ that no agreement had been reached.
Later in the same year, with no progress and following intervention by his old contact, the Daesong chairman, McAskill says, he was recalled and tasked with dealing directly with Morgan Grenfell instead of ANZ.
“I insisted that one person had to be nominated with full authority to negotiate with me and when we came to the point of signing a revised document ANZ had to confirm in writing that they had all agreed and that Morgan Grenfell had full authority to make and sign the agreement.”
At that time, “the financial markets were in turmoil and debt forgiveness started to become a major feature of negotiations. The Morgan Grenfell representative, Halcrow, asked me to lunch at the bank. He said straightaway that he did not think there was a hope in hell of ever getting the money back with what was going on in the markets then. He went on to say, ‘Let’s cut the crap. You pay us 25 cents on the dollar in cash and we’ll write off the rest and call the deal done.’
“I knew Pyongyang could not raise that amount of cash up front so I came back with a counter offer of 30 cents on the dollar – $270 million – payable over three years at 1% over LIBOR with repayment, including interest, to start after three months and paid from the proceeds of the bullion shipments,” McAskill tells Asia Times.
Again the agreement provided for a new loan this time to Korea Daesong Bank for the same amount that it would be paying to satisfy the lenders. While the original lending had been classified as private, documents for the new loan would have shown it as Paris Club sovereign debt, guaranteed by North Korea’s central bank.
“That was what we agreed and the Morgan Grenfell rep went with me to Vienna to meet the Daesong chairman and he hosted us at a great dinner and the agreement was signed by Morgan Grenfell, the chairman, and me as a witness,” the British businessman recounts.
“We returned to London the next morning very satisfied. That evening the Morgan Grenfell man called me after he had met with ANZ and said that ANZ had balked at the agreement and insisted Korea Daesong Bank put down a US$10 million deposit to the two syndicates, to be held in escrow by Morgan Grenfell, in case Korea Daesong Bank defaulted for whatever reason.”
McAskill says he had expected such a move and provided for it. “Having made arrangements with the Daesong chairman, I said that was not possible as we had already signed the agreement – and I offered him US$5 million, which he readily accepted, and the money was transferred to Morgan Grenfell the next day.”
Overall, “the strategy was a masterstroke,” McAskill says. “Not only did it wipe out the old loan as fully settled, but at the same time, Korea Daesong Bank was recognized as a new borrower in good standing.”
The repayment schedule “was being made from the monthly bullion shipments, which were in US dollars. “Korea Daesong Bank controlled all the bullion mining and smelting with the central bank doing the refining and assaying, after which the marketing was passed back to Korea Daesong Bank.”
McAskill pauses to ensure that the import of what he is saying sinks in. “If that deal had gone through, North Korea would have grown along with it, and the world would be a different place,” he says.
The deal did not go through as the two syndicates could not agree. “ANZ was clearly under pressure not to complete the deal, whereas Morgan Grenfell thought, given the deteriorating situation, it was the best they could expect,” McAskill said.
“At the meeting with the Daesong chairman in Vienna, Halcrow of Morgan Grenfell signed the agreement on behalf of both syndicates but with the proviso that the agreement had to be ratified at a full meeting of creditors, which he would call as soon as he returned to London. He assured us that was merely a formality. I was not at the creditors’ meeting but what happened was relayed by Halcrow himself.”
McAskill interjects a reminder that “as provided in the original agreement signed and buggered up by ANZ, Korea Daesong Bank would be given a new loan of US$270 million, subscribed to pro rata by all the original lenders of record. That loan would be used to pay off the original loans – leaving Korea Daesong Bank with a fresh three-year loan on those terms.”
McAskill says Polton of ANZ “addressed the creditors’ meeting and to everyone’s surprise he made a long speech about not being in favor of ‘debt relief’ and that he would not be making any recommendations to the meeting and that every member should get directly in touch with their syndicate and register their vote.
“Halcrow was livid and told me that he was quietly confident we would win because only 51% was needed for victory and that a substantial number were in both syndicates.”
However, “Morgan Grenfell never heard from ANZ the full result of the creditors’ vote and so the deal simply died. A short time after, it was announced that ANZ had formed a steering committee and would try to renegotiate” – with the Foreign Trade Bank, which as noted above had been replaced in the scheme of things by Daesong. That went nowhere.
“It was a nightmare dealing with Polton,” McAskill says. “I’m convinced the head office in Oz put him under huge pressure to abort any deals.”
Although he’s a harsh critic of the North Korea policies of the recent George W. Bush and Barack Obama administrations, Ronald Reagan was still in power in 1987 and McAskill sees ANZ, not Washington, as having been responsible for ruining that particular chance to bring Pyongyang back into the global financial system.
“In my view it was totally internal pressure,” he says. After fumbling the first-round deal, people at the bank may have felt “humiliated” when the Daesong chairman brought McAskill back to the negotiations, he speculates.
After the failed negotiations, bankers in London eventually created the “North Korean Debt Corporation.” Lenders of record exchanged original debt parcels for specially created certificates issued by the corporation. The certificates could then be traded on the London secondary debt market.
McAskill, noting that North Korea had made a $5 million up-front escrow payment promptly upon demand, continued to argue that the restructuring deal the two syndicates had previously signed onto was the legal and enforceable one.
After the banking syndicates failed to ratify the agreement, McAskill says, he advised Korea Daesong Bank not to demand the return of the escrowed funds because the banks could construe such a demand as a North Korean default and refuse to return the funds.
After “nearly one year had passed with no hope of ever getting the deal done,” McAskill says, he “made formal demand for the return of the escrow funds plus interest.” When that was refused, he registered a complaint with the Bank of England and was invited to a meeting to explain the situation.
“After the meeting, the very next day, the escrow funds plus full accrued interest were returned to Korea Daesong Bank,” which McAskill construed as “acknowledging that the syndicate banks had aborted a legally enforceable agreement.”
After the agreement was aborted, the syndicates “continued to add interest and penalty-interest on the full amount of the original loans,” says McAskill. “The last time I really looked at it” the debt had increased to over $3 billion.
A veteran Asia correspondent and a Pyongyang watcher since 1977, Asia Times Associate Editor Bradley K. Martin is the author of Under the Loving Care of the Fatherly Leader: North Korea and the Kim Dynasty.