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[Editorial] Gov`t Responsibility for Restructuring

Posted November. 21, 2008 18:31,   


Two weeks have passed since the government’s announcement on providing “selective and preemptive” support for the troubled construction sector, but neither support nor restructuring has come. Many builders face bankruptcy, but of the nation’s 100 largest builders that the government advised to join a debt rescheduling program, none have applied.

Korean builders, which conduct lots of overseas construction, are reluctant to enter the program for fear of being seen as cash-strapped. Many are refusing to do so because they expect the government will loosen conditions for taking out loans from banks. Capitalizing on the fear of mass bankruptcies, the distressed builders are threatening the government. The situation is not so different for small and mid-size shipbuilders.

The government’s ambiguous attitude is largely to blame for this situation. The purpose of the debt rescheduling program is unclear. Some say the goal is to provide bailout funds while others say it is for restructuring. Eligibility requirements for the program are also vague. At first, the government said only builders with “BBB” grade corporate bonds or higher can apply, but now says creditor banks could allow in those with lower grade bonds. Construction companies are dragging their feet, citing the program’s ambiguity. Banks are also hesitant to participate over fears that they will shoulder the burden of rescuing troubled builders.

The government has epitomized the pursuit of self-protection by delegating the responsibility for running the program to the Korea Federation of Banks. The federation said, “The financial sector and companies can solve the problem on their own authority.” This simply means the government is avoiding responsibility. It said it will support “viable” companies only, but has since backtracked by saying, “We have to revive them through all necessary measures.” Now, the government is cowardly passing the buck to banks.

Whether a full debt workout program or a "pre-workout" providing liquidity before a company goes under, the government must bear the responsibility. This is not the time to engage in dispute over state intervention. The government should take the lead by gathering opinions from creditor banks, making practical judgments on a case-by-case basis, and sticking to basic principles. Equally important is to stave off moral hazard that can arise from the failure to hold companies accountable for mismanagement.

Financial Services Commission Chairman Jun Kwang-woo hinted at an overhaul of the banking sector Wednesday by saying, “Marriages between domestic banks may be in the cards.” Recalling the lesson from the 1997-98 financial crisis, the government should push for restructuring in a principled and transparent manner.