Restructuring efforts hit snag due to loan scandal

The second round of corporate and financial restructuring, pursued by the government to boost the ailing financial markets, has hit a snag. Operations at the Financial Supervisory Service have come to a near stop after the illegal loan scandal involving Dongbang and Daeshin Mutual Savings & Finance Companies, known as ¡°Chung Hyun-Joon Gate,¡± broke out on top of the ongoing parliamentary inspection of the government. Trouble seems to be inevitable, particularly as the government already set a tight timetable for restructuring by pledging that it would announce the lists of companies subject to mergers or exit orders within this month. It is feared that the unrealistic schedule will only damage the public credibility of Korea¡¯s restructuring efforts. This being the case, the financial markets are already plummeting. Foreigners are selling Korean stocks in large quantities, driving down stock prices, and the won¡¯s exchange rate with the dollar is rising sharply.

A high-ranking FSS official admitted Thursday that the judgment on companies subject to exit orders, initially slated for the end of this month, will inevitably be delayed until early November. The FSS is in charge of supervising and encouraging banks¡¯ deliberations on exit orders, but the financial watchdog had no time to do so as it is undergoing a parliamentary inspection and is also busy fielding the prosecution¡¯s questions on loan scandal, he explained.

The Credit Risk Assessment Council, which is set to be convened to make final judgments in the case of differences of opinion between banks, has virtually ceased operations as the FSS failed to act as a coordinator. An official of a commercial bank said that the FSS should reveal which banks render different judgments on companies to be dissolved, but failed to do so. He assumed that the financial watchdog¡¯s operations have been mired in a state of near paralysis.

Without additional financial supports or debt rescheduling, some workout companies chosen for dissolution will be subject to two different yardsticks. For instance, Peeres Cosmetics Co., which went under a workout program in November 1998, is scheduled to be released from the program early next month under a written agreement by creditors, including those in the second financial sector. However, as the company is to be judged insolvent by banks ahead of this time, it could be classified as a company for revival by one side and into one for dissolution by the other. An official of Peeres¡¯ creditor group complained that creditor financial institutions are being forced to make a decision while the destiny of the company has already been determined. As a result, he said, high-ranking officials of banks are also finding it difficult to offer clear-cut guidelines.