Commentary: Korea's Credit-Card Mess Needs a Clean Sweep

By Moon Ihlwan

It seems hard to believe, but just two months since taking office, South Korean President Roh Moo Hyun is jeopardizing his reformist credentials. Onetime supporters are accusing him of opting for short-term fixes to deep problems, much as his predecessor did. "There are ominous signs that the same mistakes will be repeated," says Kim Sang Jo, head of the Economic Reform Center of the People's Solidarity for Participatory Democracy, an ardent backer of Roh's presidential campaign.

Roh, like ex-President Kim Dae Jung, billed himself as the outsider who would not bend when business squealed. But Kim struck backdoor deals with the chaebol that allowed many of them to stay afloat after the 1997 Asian crisis. Roh too appears to be buckling to intense pressure to secure financial stability at the expense of needed structural change.

At issue is a proposed bailout of the overleveraged credit-card industry. The average delinquency rate at the country's nine credit-card companies rose to 11.3% last year, up from 5.2% at the end of 2000. Debt-burdened consumers are shunning plastic and crimping revenue flow at the banks and other firms that own major card issuers.

In an ideal, tough-love environment, the government would provide limited relief but let the sickest issuers of these credit cards suffer the consequences. Indeed, some issuers were on the verge of bankruptcy, and a major industry shakeout was looming -- until Roh's government intervened. While the Administration is not injecting public funds, it is pressing chaebol, such as Samsung, LG, and Hyundai, whose financial arms issued many of the credit cards, to inject funds into these subsidiaries. The chaebol, apparently fearful of lawsuits, seem ready to comply. The government is also leaning hard on banks with card units, such as Kookmin Bank, Woori Bank, and Shinhan Bank, to inject funds into their credit-card arms.

Under the emergency package announced on Apr. 3, banks and others with card businesses must put up an additional $3.83 billion to boost the capital of their credit-card affiliates. But that's not the only bailout. The plan also mandates that banks, brokerages, and insurers arrange bridge loans of $4.2 billion to aid the hobbled investment-trust industry, which is a big holder of securitized credit-card debt, and which has been a weak spot in Korea's financial system for years. Not only that, institutional investors holding credit-card debt are required to roll it over indefinitely to give bond issuers more time to pay. Financial supervisory commission head Lee Jung Jae defends the bailout, saying failure to do so "could create unrest for the whole financial system."

Most financial experts agree Roh's package will ward off a near-term financial crisis. The trouble is, the country loses credibility by resorting to makeshift remedies that ignore the market principles Roh has pledged to uphold. "This is simply terrible," says Jun Sung In, an economics professor at Hongik University in Seoul. "It will scuttle all efforts made since the financial crisis to help establish market discipline."

Jun and others say that by letting the credit-card hawkers off the hook, bad managers are being encouraged to take ever-bigger risks down the road because they can expect a government rescue. The risks they took were already considerable: Customers were induced to sign up with -- in one case -- $8 handouts during a curbside marketing campaign. The value of credit-card-based transactions shot up from $53 billion a year in 1998 to $519 billion last year, says an industry trade group. Debts snowballed as card holders paid off one card with another. Cash advances and loans account for nearly two-thirds of the total transaction volume in Korea, compared to less than 20% in the U.S.

Card operators seemed to care more about meeting sales goals than checking the income stream of their subscribers. For that transgression, critics say heads must roll at the credit-card companies, the rating agencies that gave their bonds high marks, and even among the ranks of bureaucrats who encouraged the profligacy as economic stimulus. What's more, they say card companies and their banking and industrial parents must be forced to make decisions free of government interference.

Of course, no one wants the government to sit on its hands if the financial system is at risk. But the Roh Administration's backdoor tactics set an unfortunate precedent at the outset of his term. As Roh rolls up his sleeves to get to work, he would be wise to heed an old Korean saw: The first button must be fastened properly to make the shirt fit.

Moon covers banks from Seoul.

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