Controversy over the public fund

There is mounting concern over the pouring of public funds into insolvent financial institutions, an effort proving to be useless. The government made a first injection of 109 trillion won of taxpayers’ money, followed by 50 trillion won in a second round of rescue. Still, that is lacking, and the government is required to provide more money. What is more, it wouldn`t be easy to collect the money that is already provided to domestic financial institutions. – Ed.

Growing possibility for using additional public fund:

By the end of March, the government spent 24.1 trillion won out of 50 trillion won raised as the second public fund injection. The Ministry of Finance and Economy reported to the National Assembly that the government plans to use the remaining 24-28 trillion won by the year`s end. The estimate is based on the current circumstances and the maximum amount projected is 2 trillion won more than what remains. In particular, there is no guarantee that there wouldn`t be a drastic change in external circumstances that might require additional public funds.

If sales of Seoul Bank or Korea Life Insurance are delayed, there is a possibility that they could consume the remainder of the public fund. Also, the future of insolvent Hyundai Group companies is hard to predict. It is possible that massive insolvency of domestic financial institutions can be found additionally. If that happens, the government might have to use a third round of taxpayers.

Red light to collection of existing input of public fund:

The only solution to avoid using additional public fund is to strengthen collection of public money already provided to domestic banks and corporations. So far, the government collected 24.4 percent of the total or 32.8 trillion won.

In particular, collection of funds so far has been focused on money raised through sale of non-performing loans. On the other hand, most of the uncollected funds are investments in insolvent financial institutions and equity investment, so it would be very difficult to collect them.

If the stock market turns bullish in the second half, the amount of public money to be collected might increase. However, considering the fact this year`s economic growth rate is likely to slide to 4 percent or even to the 3 percnet level, it is unlikely that the stock market will recover. All in all, the government`s position to supply public money will encounter trouble.

Where are the funds used?

So far, the government has poured a total of 134 trillion won into financial institutions. By type of institution, it provided 80 trillion won to banks, 54 trillion won to secondary financial institutions such as merchant banks and securities firms. The government issued bonds to raise a fund of 83 trillion won. It collected 27 trillion won from existing public funds. And the public fund has been used to purchase 14 trillion won worth of assets and sale of non-performing loans through the Korea Asset Management Corp.

Government policy for recovery of public funds:

The government is planning to sell the non-performing loans by issuing asset-backed securities, corporate restructuring vehicles and international bidding. Also, the government has decided to investigate large corporations that triggered the insolvency of financial institutions. However, industry analysts pointed out that the money collected from the public fund provided to financial institutions wouldn`t constitute a large portion of the entire public fund.

Kwon Soon-Hwal shkwon@donga.com