Why Seoul Can't Let Go of Its Banks

After a successful bailout, the pols want to see some payback

Four years ago, South Korea's banks were making even the banks in Japan look good. Bad loans, loose standards, and destructively cozy relations with the country's conglomerates, or chaebol, promised to keep the banks in the emergency room for years. But now, after a remarkably short convalescence, the industry is out of intensive care. After losing $3.2 billion in 2000, South Korea's 21 banks earned $4 billion last year. Perhaps most impressive is the turnaround at the four big banks taken over and recapitalized by the government since 1998. Long seen as irredeemable because they finance South Korea's debt-ridden chaebol, all turned a profit last year, and the two that list their stock saw share prices double.

Now, the time seems ripe for the government to off-load the four: 100% state-owned Hanvit Bank and Seoulbank, 80% state-owned Chohung Bank, and Korea Exchange Bank, in which the state is the largest stockholder, with 33% of the shares. But not so fast. The bank bailouts have always been a political hot potato, and elections are coming up: first local balloting in June, then a presidential plebiscite in December. Both parties favor selling the banks, but they're loath to do it before Seoul can recoup what it put into them--$20.5 billion, not counting the sale of some of their bad loans. Moreover, policymakers don't want to sour the recent buoyant mood on the Seoul bourse by flooding it with new shares. "To promote the banks' autonomy, we are committed to privatization, but it will have to be gradual to maximize the recovery of public funds and minimize the impact on the market," says Joo Hyung Hwan, a director at the Finance & Economy Ministry.

Unlike in Japan, where a banking crisis has dragged on for a decade because of recessions and government foot-dragging, Seoul acted swiftly after the 1997-98 Asian turmoil rocked its financial sector. It spent $118 billion to clean up the balance sheets of banks, investment trusts, insurance outfits, and savings companies. The banks took advantage of their fresh start by focusing on loans to consumers rather than the chaebol, thus tapping a source of new profits. And as South Korea flung open its financial system after the crisis, foreign investors took big stakes in some banks and started influencing boardroom decisions. "The most essential driver for restructuring was when foreign shareholders started monitoring Korean companies and putting pressure on the stock market," says Shin In Seok, an economist at Korea Development Institute.

Koreans, however, are still ambivalent about foreign investors, and that's yet another obstacle to privatizing the four banks in government hands. Politicos still remember the nationalist rain of criticism that fell on them when they sold a 51% stake in Korea First Bank in 1999 at a fire-sale price to U.S.-based Newbridge Capital Group. Yet the only other likely purchasers of the state-owned banks are the chaebol. Selling to the chaebol would violate Kim Dae Jung's key pledge to sever the often-corrupt ties between Big Business and the banks.

Another dilemma: If the banks' new owners were truly independent, their first move might well be to cut off the banks' remaining deadbeats, unless the government were to spend still more money to mop up bad loans--which isn't likely in an election year. The Korean central bank figures that some 30% of the country's manufacturers don't make enough money to service their debt, and pulling the plug on these companies would throw hundreds of thousands of workers into the streets. "The cleanup has not been complete, and that's hampering privatization," says Kwon Jae Jung, a research fellow at the bank-funded Korea Institute of Finance.

As long as it holds on to the banks, the Kim government, despite its reformist efforts, won't be able to stop itself from using their capital to shore up insolvent companies. In the worst recent case, Seoul forced Hanvit, Korea Exchange, and Chohung banks to pump billions into money-losing Hynix Semiconductor. Hanvit President Lee Duk Hoon complained that, despite the favor, the government intervened to stop a small salary increase for his staff designed to boost morale after a three-year wage freeze. "Unless banks are run independently, you can't have a market-led economy," says Park Won Am, a Hong Ik University economist. True enough. Trouble is, the final step toward independence for the banks may prove the most difficult of all.

By Moon Ihlwan in Seoul

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