Reason to raise fresh public funds

The Korean government announced that it would raise an addition 40 trillion won in public funds to promote financial restructuring, far larger than the initial estimate. The decision seems to arise from a sense of crisis and pressure on the government to tackle pending economic issues, such as financial and corporate reform and stabilization of the financial market, head-on through injection of massive public funds in the face of public criticism. However, the amount of public funds needed has consistently fallen short of the government¡¯s estimates. Moreover, the government cannot escape from blame for its political failure, considering that it now needs to raise additional public funds even though it has already poured an astronomical 110 trillion won into financial restructuring.

Why 40 trillion won?

The finance-economic minister Jin Nyum apologized before the public and the National Assembly in a press conference on Friday related to the need to raise additional public funds. But he insisted that any delay in financial and corporate restructuring – the most urgent issue faced by the nation – would lead to a loss of confidence by foreign investors, which would lead to a further burden on the people. For this reason, he asserted, the decision to raise additional public funding was inevitable.

The government explained that the delay in the resolution of problems at troubled firms such as Daewoo has given rise to a surge in non-performing loans at financial institutions, which has resulted in the pressure to raise more funds. In addition, more funding has became inevitable since public fund spending increased to 50 trillion won from the original estimate of 30 trillion won and the government¡¯s plan to generate capital through the sale of its shares in state-owned banks fell through largely owing to the bearish stock market. The government stressed that it has no time to delay because of negative factors such as soaring oil prices and the jittery domestic stock market and growing distrust about the corporate reform drive.

Where to use the public funds?

The government increased its estimate of the amount of public funds that are needed from its earlier announcement in May because of the raising of the BIS ratio for commercial banks to 10%, capital investment into Seoul Guarantee Insurance following the delay in the sale of Daewoo Motor, additional restructuring of savings and finance firms and the National Credit Union Federation of Korea, liquidation of insolvent merchant banks and financial support towards trust investment firms. But it failed to calculate the amount of public funds required for capital investment into Suhyup and Nonghyup, additional allowances for bad debts at banks, retained earnings appropriated to reduce the accumulated deficit of Hanarum Merchant Bank and purchase of stock investments of the Korea Development Bank and Industrial Bank of Korea.

Problems:

The failure in public fund-related policy has been harshly criticized. The government had insisted last May that it would never require additional public funds, but within only four months it suddenly changed its tune and is raising an additional 40 trillion won. Some argue that the government has adopted a stopgap measure just to protect itself from the tough attack from the opposition party after its crushing defeat in the general election.

Will the financial markets be stable?

Local economic experts admit the inevitability of the measure to raise more funds, separately from the criticism over the political failure. Lee Young-Ki, senior researcher at the Korea Development Institute said, ¡°It is a proper measure for recovery in market confidence to raise more public funds than the initial estimate of 20-30 trillion won. If the amount of additional public funds needed were reduced, costs could increase in line with growing doubts over financial restructuring.¡±

But market watchers warn that the economic crisis could be aggravated if the spending of public funds is not carried out transparently and could be like pouring water down the drain.