Who Will Pay the Debts?
May 22, 2000
1.The unsavory economic policies and the pitfalls of the privatization
Despite the numerous and vigorous denials from DJ Kim’s financial mandarins, dark cloud has been on the South Korean economic horizon since the Daewoo bankruptcy last year.
DJ government has contrived to hide the most troublesome data of the economic performance from the public in order to avoid the political defeat in April election, and after the election he has taken the South Koreans a wild goose chase to the summit talk that appears to be a mere courtesy call of kowtowing to the Great Leader, without any detailed framework for the agenda.
Take for example, DJ’s mandarin from the Financial Supervisory Commission (FSC) had recently announced that a total of W101.9 trillion in public funds has been pumped into the financial sector for bailouts since 1997, contrary to what they said in January that they has spent W76.7 trillion worth of taxpayer’s money, a whopping discrepancy of over W24 trillion in four months.
In addition, they have not been frank enough to admit that they have almost completely depleted the state money to cover additional W30 trillion, saying only that they would not seek any more public funds requiring the parliamentary approval.
The trouble is the Standard & Poor, the global credit rating agency, has estimated that DJ needs an additional W120 trillion, not W30 trillion that his boys claim, to complete its restructuring in the financial sector.
One would have no trouble to find that DJ has been up to no good for the financial con game to cheat his people…his basic financial rescue plans have been robbing Peter to pay Paul or raising money from the state-owned stocks sales and issuing recklessly the state-bonds in the world financial market.
There are two major state-run corporations to deal with the restructuring, the Korea Deposit Insurance Corp (KDIC) and the Korea Asset Management Corp (KAMCO).
The KDIC has almost depleted their money in the rescue operation of Korea First Bank, Seoul Bank, Hanvit, and Peace Banks providing a total of 20.3 trillion won, and they only expect to recover 7 trillion won from their investment in banks within this year while holding currently W 1.3 trillion in reserve that can not be used because it is designated as a contingency fund in the event of bankruptcy at the financial institution.
The KAMCO accounts were flooded with nonperforming loans of banks, investment trust companies and other financial brokerages, and they can only raise about 8 trillion won this year through the fire sales or auctions of their nonperforming loans in the market.
What DJ has been hawk-eyeing for since his inauguration is that he, like former Russian president Yeltzin, wants to sell off, under the guise of the globalization, all available national assets and resources to the transnational corporation in the Wall Street, whether it is vital and necessary for the well beings of his people or is profitable to maintain as national corporation.
The Korea Electric Power Corp (KEPCO) is one of the lucrative companies that are vital in major industrial sector to keep under the umbrella of the Korean ownership. When the government has encountered the strong opposition against the privatization, his boys employed a sneaky alternative measure by splitting the corporation in several companies and using the company stocks as collateral to issue exchange bonds.
The Korea Tobacco and Ginseng Corp is another victim of DJ ‘s recklessness in the privatization of the national assets.
It is highly inconceivable that South Koreans would ever realize that they would shiver, if defaulting in the bill payment, in cold with no power to cook rice and no DJ Kim around to protest against, because their power is switched off by the cigar-chomping robber barons in the Wall Street off 10,000 miles away.
2. The unhealthy financial sectors
The investment trust companies that were taken over by the government require an infusion of 5 trillion won in taxpayer’s money in restructuring that is key to sustain the stability of the domestic stock market, and DJ has no choice but to bailout pumping 3 trillion won with taxpayers money until the end of June (they hastily abandoned the initial plan to bailout two state-run investment companies with three installment payments because it may trigger another time bomb if it fails to do so immediately.)
Another Investment Company of Hyundai Group recently had liquidity crisis that was pulled out of the water before drowning by the government.
There have been close inter-relationship of banks, investment companies and Chaebols that constitutes the backbone of the South Korean economy, and recent turmoil at the investment companies has undermined the confidence of the institutional investors in the stock market because it reveals that the weak financial profiles of the Chaebols have not been addressed adequately in the reduction of debt-to-equity ratio.
Despite of the government’s announcement that the top Chaebols had achieved their goal of lowering debt-to-equity ratio below 200 percent, the reduction appears to be misleading because it was achieved by increasing capital rather than decreasing the debts.
Since the some capital increases originated from their own subsidiaries or highly leveraged other conglomerates and the debts levels have remained high in international standards, the debt-to-equity ratio of 167 percent that the financial mandarins boasted would not have much significant meaning in the analysis of the economic health charts.
As the banks are reluctant to contribute in the reduction of debt-to-equity ratio scheme, the investment trust companies have purchased the bonds issued by the Chaebols to make up the shrinking bank lending, shifting the risk from the bank to the investment trust companies.
The irony is that the risks, whether it is shifted from one financial institution to another, does not disappear overnight, because they are closely intertwined each other like parasites thrive on weakened species as the banks invest in beneficiary certificates issued by investment trust companies and the Chaebols are still the essential customers for the banks.
However, the most dangerous and crucial factor that may determine the health of the South Korean economy depends on how the government finalizes and closes the deal in Daewoo Corp bankruptcy, of which principal of its debts amount to W80 trillion or $80 billion (one should not forget the amount of debts exceed over the entire South Korean government budget)
The workout plan has hit the glitch when the creditors of Daewoo Motor and minor shareholders have started filing legal actions to impound Daewoo’s assets, and many financial institutions are heavily exposed to the Daewoo debts with minimal recovery chance.
To add another blow to the government’s assertion that the economy is sound and healthy, a textile conglomerate ranking as the nation’s 27th largest Chaebol fell into the insolvency, even though the financial mandarin has given a clean bill of health on this company two weeks ago.
It has clear implication that many other mid-sized Chaebols are in danger of facing cash flows and the government agency (FSC) has covered up on the result of its investigation into the mid-sized Chaebols in terms of debt-to-equity ratio, which triggers the suspicion that many corporations may have not satisfactorily achieved the restructuring program.
However, it is illogical to expect that the conglomerates are capable of achieving the workout programs without additional infusion of fresh capitals that may be absorbed by the local financial institutions that do not want to expose to the possibility of fresh insolvency, because the lending institutions have W80 trillion of nonperforming loan, 15 percent of total credits.
3.The gloomy financial prospects.
There are many factors that determine the future growth and health of the economy.
a. The short-term external debts with maturity of one year have reached $43.4 billion, 30.3 percent of the total in March that was the trigger point of the financial crisis in 1997.
b. The oil price is rising from last year that adds $1 billion in energy imports per year in one dollar per barrel increase and there is zero chance the price would come down in near future.
c. The trade surplus during the first quarter of this year plummeted to one tenth of last year’s $8 billion, and the government has revised the trade surplus target of this year from $12 billion to $10 billion instead the financial analyst projects $8 billion.
d. The labor disputes have intensified in every sector of export businesses where the workers demand 15 percent wage increase and 40-hour workweek.
e. The interest-rate hike and tech-stock index plunges in the US has triggered the massive outflows of the foreign capitals by the American institutional investors. The governor of South Korean Central Bank had exhibited his stupidity saying that the interest hike in the US doesn’t affect any significant impact in economy ignoring simple fact that it costs more to borrow money from the US banks.
f. The foreign capitals will abandon the Seoul bourse in full swing when China joins the WTO and opens their market.***
***“The China factor” would have the most important ramification in the globalization of the world economy in near future: the intense efforts by Clinton Administration to upgrade the Chinese status to the permanently favored trade partner have dirty little secrets that the world needs China desperately for the expansion of the overheated global market as the stock markets gradually have signaled its fatigue and weariness, and Uncle Sam has been barely managing to keep the global engine running by assuming enormous trade deficit ($40 billion), in which South Korea benefited.
In preparation with the opening of Chinese market, Uncle Sam has to raise fresh capitals without causing inflation that they have already been floating the trial balloon: the privatization of the Social Security Funds or the releasing of certain portion of the funds to the contributors who can speculate on the stock market.***
One of the most worrisome phenomena is the growing gap between the rich and poor. The World Bank last year estimated that 19 percent of urbanites in South Korea are living under the poverty line in 1998. This percentage is more than double the 9 percent in 1997.
When we assume that some 70 percent of the Korean population are living in cities, the statistics indicate that the number of the urban poor increased from about 3 million to 6 million in one year. (The Bank defines someone as living in poverty if one has less than $4 to live on per day.)
While DJ government announced loudly the unemployment rates has been in decrease, only less than half percent of the employed are regular and full time workers and most of workers who have found jobs are temporary workers.
There is strong indication that the labor movements would spread out nationwide in conjunction with the beginning of the summit talk that promises nothing but the pie in the sky.
4. The Socialization of the Debts
Last year, DJ Kim has spit out an improbable braggadocio declaring that his government promises to bring the full employment in 2003 and balanced budget in 2004, while the state-run Korea Development Institute, quite contrarily, has projected that the national debt is expected to reach from 118.8trillion won in 2000 (22.7 percent of GDP) to 154.7 trillion at the end of 2002 (24.9 percent of GDP).
It would be the financial miracle that may warrant for the Nobel Prize if he could achieve the intended target. (One should note his term expires early 2003)
With some knowledge of economics, a sophomore in the college knows that there is no such things like the full-employment in the capitalistic society and it is highly unattainable and undesirable getting rid of deficit in the national budget.
I gather that DJ simply has tried to hoodwink his people – the Supreme Commander of US occupational forces in South Korea in the 80s has made fun of Koreans as a bunch of lemmings, when he saw no one objects Gen. Chun’s robbery of the presidency – who have the tendency to follow their leader with blinkers on.
The South Koreans, like lemmings, had responded immediately without question queuing up a long line to donate their precious gold bullion and US dollar bills in order to save the country from the shameful bankruptcy, even though they have got nothing to do with the debts of few conglomerates.
DJ knows very well that his lemmings are taught not to realize the debts are being socialized through the various policies of his government and they will obediently line up to pay the debts when they are called upon.
When one traces the debts of the South Korea, it turns out that the borrowers were around hundreds of thousands among 42 million people, like generals and his cohorts, some bureaucrats, and fatty businessmen around the military dictatorship.
When the financial crisis broke out, the borrowers were not held responsible for it and rather become richer with higher interest rates, but average Joe-six-packs have to endure the shock-therapy of the International Monetary Funds.
In fact it is hopeless task to pay off the debts that they did not borrow, since the debts have been socialized and metastasized in whole body of the society.
Who will eventually have to pay the debts off? DJ Kim? Conglomerates? Generals? People?
By design, DJ Kim becomes a poster boy for globalization, Conglomerates more richer, Generals more powerful, and finally People sitting ducks for the ravenous Wall Street financiers.