Commentary: Korea Is Cheering Far Too Soon

For Koreans mesmerized by the foreign bankers who have held so much sway over their fate, the latest deal on Korea's debt was like the final act of a great drama. On Mar. 16, a group of 134 banks from 32 countries agreed to swap $22 billion in short-term loans to Korean banks for longer-term credits guaranteed by the government. Citibank Vice-Chairman William R. Rhodes hailed the deal as "a vote of confidence" in Korea.

It's nice to get a compliment from Bill Rhodes. But maybe, for Korea's sake, he should have been more stinting with his praise. A dangerous complacency is rising among Koreans who have seen the foreign-debt issue as the key to all of their country's problems. That's bad, since the Koreans cannot let down their guard at this perilous moment. If they do, all their suffering could end up for naught.

Already, the sense is building that the worst of the crisis is past. Consumers are thronging department stores, gleeful youths are buzzing around discos, and traffic is snarled again as drivers take their cars out of the garages where they stored them when the foreign-debt crisis began. Shopkeepers are removing signs reading "IMF sale"--a clever way of advertising wholesale liquidations. "I don't see any signs the country is in economic distress. My hotel is packed with well-dressed partygoers," comments a Western businessman visiting Seoul.

Yet Korea has hardly turned the corner. Massive loads of debt still weigh on the manufacturing sector. Undercapitalized banks keep offering cheap loans to their sickly clients. "The patient is just off the life-support system. The big operation to remove the cancer has yet to start," says economics professor Min Sang Kee, of the prestigious Seoul National University.

The deal with the foreign banks does nothing to wipe away some $300 billion in won-denominated debt that's crushing companies. They cannot issue stock to pay off loans, since the risk of default is scaring off many potential investors. Exports are rising, thanks partly to the depreciated won, but not nearly fast enough to relieve pressure on margins. Foreign firms are buying parts of some companies--but at nowhere near the scale needed to restore liquidity to the system. Yet it's hard to find evidence that the country's sprawling conglomerates are reshaping themselves into profitable core units. The banks could force the chaebol to reform by threatening to cut off credit. But by and large, they are not applying any pressure at all.

The recalcitrance of the chaebol could ruin labor relations. In February, fears of total economic collapse forced unions to accept legislation allowing layoffs to speed up corporate restructuring. Now, 10,000 workers are being laid off every day: As generous severance packages run out, consumer spending will dwindle. But the chaebol are still not heeding calls to dismantle their empires and make themselves more accountable to their shareholders. "Basically, the chaebol have been resisting reforms, and the government is not doing anything about it," complains Yoon Young Mo, international secretary at the Korean Confederation of Trade Unions, which has more than 500,000 members. "We are now contacting those who lost their jobs recently to organize demonstrations."

BAD LOANS. Policymakers are either underestimating the problem or hiding the bad news--just as they did before the external debt crisis hit. Analysts say some 17% of the country's total bank loans are nonperforming--instead of the official figure of 6%. Worse, the government is not disclosing the huge debt problems that the insurance and investment-trust companies are facing.

Most investors and foreign governments appear convinced that President Kim Dae Jung is committed to reshaping the economy. But the bureaucratic old guard and partisan politicians are standing in the way. Economic policymakers have pressured banks to keep lending to troubled companies that should go out of business. And the main opposition party, which controls the National Assembly, is holding up Kim's reforms while it wrangles over the appointment of Kim Jong Pil as Prime Minister.

The President's advisers now fear the reform movement may lose its momentum, just as more debt-riddled corporations are collapsing. Korea's publicly listed companies lost a total of $3.3 billion last year, vs. a profit of $2.6 billion in 1996. While Koreans exult over the rollover of foreign debt, they should also contemplate these more sobering figures--and take action fast.

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