Restructuring`s Burden on Taxpayers

After assessing the credit risks of 1,985 large domestic corporations with a combined 50 billion won (41 million U.S. dollars) in debts owed to domestic financial institutions, creditor banks selected Friday 65 large companies for restructuring. The companies in question will undergo debt workout or face liquidation.

The state committee that manages public funds for corporate restructuring will also inject 2.8 trillion won (2.3 billion U.S. dollars) to purchase bad project-financing bonds issued by domestic savings banks. The fund injection comes less than two years after the government`s purchase of 1.7 trillion won (1.4 billion U.S. dollars) in bad debts in 2008 and last year. Failure to clean up the financial mess through two rounds of restructuring has put an additional burden on taxpayers.

Savings banks have rushed to increase their project-financing loans to real estate developers since 2005 amid low interest rates and rising property prices. The combined loan amount surged from 45.3 trillion won (37.2 billon U.S. dollars) in late 2006 to more than 78 trillion won (64.1 U.S. dollars) in June 2008. Though the slump in the real estate market since the onset of the global financial crisis led to preemptive measures to prevent bad loans, financial authorities dragged their feet based on the expectation of economic recovery, losing the restructuring opportunity.

The government could have carried out restructuring after the 2008 global financial crisis broke out but delayed the timing over fears of economic depression and unemployment. It missed another chance earlier this year in failing to restructure the construction industry because of fears of a backlash ahead of the June 2 local elections. Creditor banks got addicted to receiving high interest of more than 19 percent a year, failing to reduce their bad loan exposure. This resulted in more money injected to cover bad assets. Financial authorities are primarily responsible for the situation since they failed to act in time.

Financial authorities and creditor banks should strictly adhere to restructuring principles to avoid repeating the same mistake. On June 17, President Lee Myung-bak urged financial authorities to hold troubled construction companies responsible for reckless housing development projects. The instruction came too late, however. Avoiding restructuring for fear of immediate pain results in greater costs later.

Creditors should not postpone the liquidation of insolvent companies for fear of asset soundness or tolerate companies that resist self-help measures. At the very least, restructuring should be conducted in time to keep financial institutions’ assets healthy.