Hidden losses around 110~120 tril. Won

A study has shown that hidden distressed debt in the financial sector may in fact be 110~120 trillion won, 20~30 trillion won greater than originally estimated. Further, approximately 20% of Korean companies were found to be paying amounts of interest greater than their profits, placing them in grave economic danger.

The Korea Economic Research Institute ("KERI"), an FKI affiliated think tank, made the assertions in its `Report on potential distressed debt in the financial sector and forecast for the 2nd financial restructuring," which analyzed 486 listed companies and 4804 unlisted companies with total assets of over 7 billion won.

According to the report, when the new FLC standard is taken into consideration, the total borrowing volume for the 5,290 companies was over 24 trillion won as of end of 1999. Out of these companies, 19.5% of listed companies (94) and 23.2% non-listed companies (1,115) did not make enough profits to fulfill their interest payments.

When comparing the results to the total lending volume for the financial sector, the potential distressed debt volume is 20~30 trillion won higher than the official government figure of 91 trillion won. In particular, when including the corporate bond issuance volume for the same companies, the total rises to approximately 140~150 trillion won.

Professor Nam Joo Ha of Seokang University, the head researcher for the report, said, "The non-banking sector did not incorporate the FLC standard, and bank sector distressed debt was underestimated as a result.

However, the potential distressed debt volume is expected to fall by 10 trillion to 100~110 trillion won owing to the enhanced profitability of the corporate sector and reduced financial costs.

In the report, it was mentioned that the second round of corporate restructuring should start by shutting down unhealthy companies. If these companies are not closed down, instability will strike the financial market regularly and a credit crunch may also ensue.

In order to overcome the failures of the first round of restructuring, such as the underestimation of potential distressed debt, further incremental and fundamental bank restructuring is needed through enhancing competitiveness, not forced mergers.

Professor Nam remarked, "If the economy deteriorates next year, the distressed debt volume in the financial sector will again surge. Now is the time to ensure restructuring takes place in both the financial and corporate sectors, supported by a sound economic policy."