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[Editorial] Measures to Alleviate KIKO-inflicted Damage

Posted October. 02, 2008 08:48,   


The Financial Services Commission yesterday announced measures to support liquidity at small companies to help those teetering on the verge of collapse despite being profitable. Under the measures, state-run banks will be allowed to provide new loans amounting to 4.3 trillion won and raise the credit guarantee limit of the Korea Credit Guarantee Fund by 4 trillion won. The measures give banks the authority to determine which companies to support.

The fates of companies should be up to the market, not the government. It remains to be seen, however, if the measures will be as effective as expected. As the failure of the U.S. financial bailout plan dealt a blow to the global financial market, Korean banks are not immune from financial catastrophe. The commission is encouraging banks to financially support smaller companies as swiftly as possible through a system in which banks also earn profits when beneficiary companies survive. Chances are, however, that simply certain blue chip companies will get the aid.

Corporations have suffered big losses due to the “knock-in, knock-out (KIKO)” currency option. They are angry over the government’s failure to provide direct support. Those that signed KIKO contracts earn small profits when the foreign exchange rate falls below the lowest limit (knock-out foreign exchange rate) that is preset in an agreement with banks. But they must sell dollars amounting up to three times the contract amount when the exchange rate surpasses the upper limit (knock-in foreign exchange rate), and this means big losses.

As the won has kept weakening since March, 417 small companies that signed KIKO contracts have lost 1.2 trillion won as of late August. Given that an increase of 10 points in the won-dollar rate incurs 100 billion won of loss, it is no exaggeration to say corporate financial losses from signing KIKO contracts amounts to 2.2 trillion won. If a company’s credit rating falls due to losses resulting from KIKO contracts, the interest it pays on loans increases. Ailing companies are sometimes forced to repay their debt. Smaller companies that say the aftermath of the world financial crisis will linger cannot welcome the government’s rescue measures, such as allowing the transfer of loans borrowed at high interest rates.

Chain bankruptcies of companies signing KIKO contracts will also heavily burden banks. Losses from KIKO contracts have snowballed partly due to speculative transactions of certain companies. Banks are also responsible for the crisis, however, since they encouraged the signing of KIKO contracts. Against this backdrop, banks should help domestic businesses overcome their difficulties. For its part, the government should do all it can to maximize the benefits of its support measures.