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Financial firms are taxpayer money pits

Posted November. 10, 2000 15:21,   


Since Korea was placed under the bailout program of the International Monetary Fund in late 1997, the government has poured a total of 109.6 trillion won into insolvent financial institutions by last August. It is equivalent to a quarter of the nation's gross domestic product, which is 484 trillion won and close to last year's government expenditure of 113 trillion won.

The first input of public fund breaks down into three categories: public fund by agreement, public fund and public fund collected for use in other institutions.

The public fund by agreement was 64 trillion won raised by Korea Deposit Insurance Corp. and Korea Asset Management Corp. with payment guarantee by the government through an approval from the National Assembly. The public fund of 27 trillion won is the money provided by Korea Deposit Insurance Corp. and borrowing from international organizations for financing to insolvent institutions.

The money refinanced by collecting public fund from local institutions amounted to 18.6 trillion won.

Of the total, 64% or 70.3 trillion won was used for restructuring of domestic banks. In particular, the government poured more than 12 trillion ton into Korea First Bank and 8 trillion won into Seoul Bank. Despite the massive capital injection, Korea First Bank was sold at only 500 billion won.

Among non-bank financial institutions, the government provided 12 trillion won each to investment-trust companies and merchant banks. Also, it poured about 4 trillion won into insurance companies, mutual savings and credit unions.

It was pointed out that the first input of public funds was too inefficient, just like the case of Korea First Bank. Besides, some indicated that the government provided funds to insolvent institutions in vain. Merchant banks such as Central and Nara were suspended their operation in 1998. They resumed operation later but eventually closed, and the government uselessly poured 520 billion won into the process.

The government purchased non-performing loans of 16 merchant banks, including Shinsegae Merchant Bank, at about 920 billion won. Yet they were closed eventually. And investment-trust companies still are struggling to stay afloat.

Experts point out that financial institutions where public funds have been injected showed moral hazards, and the government failed to call owners of insolvent corporations to account.