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No End in Sight
South Korea's efforts to restructure its economy continue to falter

Forcing insolvent South Korean companies to restructure is a thankless task. The families with a controlling interest drag their feet. The workers revolt. Foreign investors lose their nerve. The last thing the government agency charged with this process needs is a scandal, so, naturally, that's exactly what it got. Prosecutors last week charged Kim Young Jae, assistant governor of the Financial Supervisory Service, with accepting almost $1 million in bribes for overlooking financial irregularities in companies under his jurisdiction. Kim vehemently denies the charges, but the accusations — and the suicide of former FSS director general Chang Rae Chan — have further compromised the government's efforts to clean up Korea Inc.

The scandal could not have come at a worse time, and in South Korea, that's saying something. Just three months ago, President Kim Dae Jung appointed Jin Nyum as Minister for Finance and Economy. The appointment came with a promise to sort out the economy's intractable problems, rhetoric geared to inspire confidence in investors fed up with the government's irresolute handling of the country's corporate-sector crisis. Most troubling was its apparent unwillingness to force the Chung family, which controls the sprawling Hyundai chaebol, to solve the liquidity crunch plaguing many of its affiliated companies. But there was also a stalemate in efforts to get creditors to close down insolvent companies that have been under government-subsidized workout programs since the 1998 Asian economic meltdown.

Jin and Lee Kun Young, Chairman of the Financial Supervisory Commission, got right to work. They pressured creditors to decide the fate of nearly 300 struggling companies. On November 3, the creditors opted to liquidate 52 of them, including the mammoth Dong-A Construction and Industrial. The forced closures sent a much-needed message to those remaining: reform or be shut down. No longer would the government provide financial support to terminal patients.

But that message has been blunted by the fact that neither Hyundai Engineering & Construction nor Daewoo Motors, two of the country's biggest basket cases, were on the list. Hyundai, the largest Korean and 19th largest global general contractor, can't pay debts coming due. Meanwhile, cash-starved Daewoo Motors is losing almost $90 million a month — with no prospect of rapid improvement now that Ford Motor Co. has scrapped plans to acquire the Korean auto maker.

The government, says a senior official, fears that Hyundai is simply too big to fail. Collapse could touch off a chain-reaction of economic havoc. Domestic projects like nuclear power plants and other infrastructure projects involving Hyundai would stall, and as overseas projects fell off schedule, the contractor would be subject to massive lawsuits and claims. Banks that provided performance guarantees worth billions of dollars on behalf of Hyundai overseas could be pushed closer to insolvency. "A court receivership is the worst thing for Hyundai as the law requires freezing of all credits," says the official. "Everything could come to a complete halt."

So the heart pump stays connected. "Hyundai is not a bad company," says Financial Supervisory Commission Chairman Lee. "Its only problem is excess debts." But that has been its only problem for some time now, and the company seems no closer to financial health. On Nov. 7, its creditors agreed to extend the maturity of about $700 million in debts due this year. That bought breathing room, but the Chung family does not have the resources to engineer a turnaround solo, and alternative solutions such as a foreign buyout are not in the offing.

Meanwhile, Daewoo Motors' absence from the Nov. 3 list may have saved it from immediate liquidation, but not from bankruptcy. The auto maker filed for protection from creditors on Nov. 10 after unions refused to support a restructuring plan which would have cost 3500 jobs. Production has been suspended at two of three Korean factories, devastating hundreds of vendors that now face bankruptcy themselves. The entire economy of Inchon, where Daewoo Motors is headquartered, is at peril, says Inchon Mayor Choi Ki Sun.

But, by postponing the pain at Daewoo and Hyundai, the government may find it more difficult to convince Korean workers facing layoffs that no-nonsense policies are both necessary and fair. The Ministry of Labor now says that the restructuring would result in a loss of 100,000 jobs by the end of this year, pushing the national unemployment rate to 4.1% from 3.6% in June this year.

Kim Dae Jung had hoped that a boom in high-tech startups would sop up job-seekers. But plummeting stock markets have dampened enthusiasm in the go-go tech sector. Korea's tech-heavy KOSDAQ market plunged from 292.55 at its peak on March 10, to 81.45 on November 15. And the Financial Supervisory Service scandal is adding to the dark mood. The company at the center of the debacle, Korea Digital Line, is accused of resorting to illegal loans to cover losses resulting from its investments. Chang Rae Chan, the senior FSS official who committed suicide admitted in a note that he left that he had received $316,000 from Korea Digital to cover the loss in the value of the company's shares he was holding.

These woes add up to a bleak outlook for tech startups. "The market seems simply not interested in any new funding requests," says Kim Sung Bu, CEO of Jeewoo Venture Capital Co. "Everybody is lying low," agrees Kim Young June, CEO of LG Venture Investment Co. "Funding simply dried up." If high-tech can't save Korea's economy, what will? Creditors, investors, and workers are still waiting for an answer the government seems incapable of providing.

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