(EDITORIAL from the Korea Herald on Nov. 13)

Preemptive bailout

A costly lesson the Korean government has learned from the 1997-98 Asian
financial crisis is that it needs to act decisively in rescuing corporations
suffering a temporary liquidity crunch.


The government needs to take a preemptive action before corporations in financial
distress degenerate into insolvency. It needs to provide them with a sufficient
-- not scant -- amount of funds. Otherwise, the bailout costs could be
exorbitant.
Korea's multinational corporations have also learned a costly lesson from the
financial breakdown -- that it is too risky to rely heavily on borrowing to
finance their expansion. Their debt ratios are now much lower than a decade ago.
Nonetheless, even some of those financially stable Korean corporations may
experience temporary liquidity shortages as a consequence of the credit crunch,
which has been fast developing in the global markets since the U.S. mortgage
market collapsed. The concern about such a possibility, shared by the
administration and the ruling party, is behind the move to institutionalize a
preemptive corporate rescue program.
The proposed preemptive rescue program would supplement the existing corporate
workout program. Creditor banks may forcibly put a corporation that is failing to
meet debt obligations on a workout program under the law governing corporate
restructuring. Or, a creditor bank and its financially distressed corporate
client may enter into a voluntary restructuring agreement.
Of course, not all corporations that have failed to honor debt obligations are
put on a workout program. Those that are deemed to have little chance of turning
around, even with substantial financial support, are put into liquidation.
In addition, a separate "fast track" program was introduced for small and
medium-sized enterprises last month. Under the program, they are grouped into
four categories of creditworthiness, with the first having no financial problems
and the second experiencing a temporary liquidity problems and eligible for
financial support. The more distressed third group is put on a workout program
while the last, having little chance of survival whatever happens, is liquidated.

The administration's idea is to allow large corporations and financial
institutions with a temporary liquidity problem to benefit from a new program
similar to the "fast track" program, which is proposed as a "pre-workout"
program. Creditors would roll over the maturing debts of the corporations on the
program, cut their interest rates and/or provide them with new loans in return
for promises by the firms to take remedial action. In the case of troubled
commercial banks and other financial institutions, the government would have to
engage in their bailout.
The proposal should be welcomed as an effort to help prevent the real economy of
growth, manufacturing and employment from being damaged by the global financial
crisis. The proposal comes at a time when auto, steelmaking, petrochemical,
semiconductor and other domestic industries are feeling the pinch from the global
slowdown.
But the administration will have to take all the necessary precautions before
fleshing out the proposal for a "pre-workout" program. They also need to address
suspicions about the program.
A case in point is the reaction of the commercial banks, which claim none of them
are under enough stress to be placed on the "pre-workout" program. As evidence,
they present their BIS capital adequacy ratios hovering around 10 percent and the
profits they have continued to generate. They suspect that they are being
pressured to increase lending to small and medium-sized enterprises in return for
support from the government.
Before launching the "pre-workout" program, the government will have to present a
plan to recover the public funds used to finance the program. It cannot throw
taxpayers' money into a bottomless pit, as it is accused of having done in the
wake of the 1997-98 financial crisis. The recovery rate stood at a mere 55
percent in September.
(END)