Commentary: South Korea Needs A Few Good Bankruptcies

A reckoning of sorts is under way in Seoul. Years of relentless and debt-fueled corporate expansion have culminated in the failure of five major South Korean industrial groups, or chaebol, since January. It has been a jolt to Koreans who thought the chaebol were too big and too politically plugged in to ever go under.

Of course, the crisis could also be an opportunity. Allowing the weakest of the overbuilt steel and auto makers to go bankrupt would mean the healthy shakeout of an economy that's leveraged to the hilt.

It's a pity that probably won't happen soon. Already, there are signs that Korean President Kim Young Sam's government intends to reshuffle assets among existing chaebol rather than let some fail outright. The government's plan for a mix of handouts and stage-managed mergers won't add up to the overhaul of the chaebol-dominated economy the country so desperately needs.

DOWNGRADE? Such preferential treatment mattered less when Korea was growing at double-digit rates. But it matters greatly now that this $485 billion economy is losing its export competitiveness and growth has slowed to near 5%. The country lacks a vibrant small-business sector to generate jobs, and it has borrowed heavily in off shore capital markets. Korea's private foreign-debt exposure is about $100 billion, or 20% of gross domestic product. A lot of that is short-term financing that could bolt at the first whiff of more trouble. That's why, on Aug. 4, credit-rating agency Moody's Investors Service placed South Korean debt on review for a possible downgrade.

All this cries out for some serious political leadership. Yet so far, Kim's government seems more interested in preserving the status quo in order to ensure the success of his ruling New Korea Party in a general election set for December. Consider the recent moves by state-owned Pohang Iron & Steel Co. It snapped up a big chunk of bankrupt Sammi Steel Co. earlier this year and last month made a $2.25 billion bid with Dongkuk Steel Mill Co. for part of the steelworks of another failed chaebol, the Hanbo Group. The bid was rejected by Hanbo's creditors. Even so, investors have been dumping Pohang shares, fearing the government will strong-arm the company into putting Hanbo employees on its payroll, adding unneeded capacity. True, the move would soften the economic pain. But it certainly doesn't make much economic sense given the global glut in steel production.

On another front, the Federation of Korean Industries, as well as ordinary Koreans who have launched a public support campaign, want the government to prop up the $20 billion Kia Group. The ailing auto-and-steel concern, with $10.7 billion in debt, became insolvent in mid-July. Its two auto affiliates, Kia Motors Corp. and Asia Motors Co., and their supplier networks account for 1.5% of the nation's economic output.

CAR GLUT. Analysts think Samsung Group, which won government approval to enter the overcrowded auto industry next year, is angling for Kia, though Samsung isn't talking. Maybe Samsung or rival carmakers Hyundai Corp. and Daewoo Corp. could revive Kia. But does Korea really need a half-dozen major carmakers planning to manufacture an excess supply of 3.45 million vehicles by 2001?

To its credit, Kim's government has taken tentative steps to cut chaebol debt levels. The Finance & Economy Ministry has set new guidelines that bar banks from lending more than 45% of their capital base to any one conglomerate. It has also limited tax write-offs on interest payments by companies with stratospheric debt loads. But that's just a modest start.

The truth is, Korea has too much capacity in virtually every sector. And that means some businesses need to fail. It also means that rock-solid job security and wage gains that have outpaced productivity gains for the better part of a decade can no longer be guaranteed either. If the chaebol don't clean up their balance sheets, refocus on core strengths, and dump money-losing businesses, their problems will only compound. It won't be a joyride for Kim or the chaebol. But the alternative is to let things get so bad that foreign lenders call in their loans and currency speculators hammer the won. Just ask the Thais.