Impact of exit orders on financial markets

Creditors have fixed and announced a list of insolvent companies to be forced out of the market. However, the financial markets are not expected to shift significantly for the time being. The insolvent companies have so far depressed stock and bond markets, but the fact that these companies received exit orders is not likely to improve the financial indexes immediately.

The stock market showed a noticeable upward trend until Friday, when the government and creditors announced a list of companies to be exited from the market. This was viewed as a sign that the market is highly welcoming the exit of insolvent companies and the imminent restructuring in the banking sector.

However, an analysis that the market confirmed the bottom when the composite stock price index hit 500 points is also convincing. Some people also noted that the stock price index has continued to fall since the government¡¯s announcement of the first group of insolvent companies in June 1998. Responding to this argument, Lee Jong-Woo, a researcher of Daewoo Securities, pointed out that the exit of insolvent companies may affect the market favorably in the short term but could hurt the market in the mid- and long-term.

But expectations are also high that if the government and creditors push ahead with restructuring according to principles, foreign investors will set out to buy Korea. In fact, foreign investors have continued to buy Korean shares for the fourth consecutive day since Oct. 30, with their net buying standing at 230 billion won.

The difference between the movement of index interest rates and the market will be difficult to solve in a short period of time. Particularly, chances are high that the phenomenon of polarization in interest rates between blue-chip corporate bonds (AA-) and non-blue-chip corporate bonds (BBB-) will persist through year-end despite the exit of insolvent companies. As of Friday, the interest rates of AA- and BBB- bonds are 3.19 points away from each other, reading 8.58 percent and 11.77 percent, respectively.

An official of the Korea Securities Dealers Association said that the problem would be solved only when investors begin to ease their grip on blue-chip state and public bonds. But he predicted that banks, a major buying power, are not likely to take over corporate bonds in an aggressive manner.

With the insolvent companies exited, the banking sector has become the next target for restructuring. According to the scope of their credit to insolvent companies, it will be determined which banks will be injected with public funds and allowed to stand on their own and which will be incorporated into holding companies.

The banking sector estimates that, considering the size of their loans to exited companies, they would require 5 trillion won in bad loan reserves. As a result, there are growing fears that banks will further scale down loans to small- and medium-sized companies in order to make funds to meet the bad debt reserve requirement and the capital adequacy ratio set by the Bank for International Settlement.

An analyst of LG Investment and Securities said that the banking sector¡¯s bad loan reserves would not be very large as the list of exited companies was quite predictable. The market credibility of banks will now depend on whether they performed restructuring faithfully or not, he pointed out.