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Debt, Bailout Costs Increasing

Seoul to Spend 1.6 Trillion Won To Bail Out 4 Financial Firms

May 02,2001
Seoul is backsliding in its vow that financial restructuring would involve no more government bailout funds. The Korea Deposit Insurance Corporation said Wednesday that it will spend 1.6 trillion won to bail out four financial companies. The amount is nearly 700 billion won more than the cost of closing the firms, which the corporation said would be 944 billion won.

The decision to recapitalize the financial services division of the National Federation of Fisheries Cooperatives and three life insurance companies - Hyundai, Samshin and Hanil - was not without controversy. A member of the insurance corporation's committee overseeing the management of government bailout funds said, "Private sector members of the committee expressed opposition to the proposal, but, in the end, we gave in to the government's position."

Less than six months ago, the government wrote into law "the principle of minimum cost" in financial firm bailouts. Two months later, the enforcement decree of the act on the use of government bailout funds was rewritten to allow exceptions to that rule in cases that the deposit insurance committee deemed "detrimental to the national economy."

It is based on that language that the committee voted to recapitalize, rather than close, the four companies.

The cost to the national economy is a vague concept that is difficult to quantify and one that can be influenced strongly by special interest groups, critics said. Attorney Ha Seung-su of the People's Solidarity for Participatory Democracy, a major non profit organization active in political and economic issues, said, "The concept of economic costs should have been written into the original act," and in terms that are procedurally clearer.

Professor Chun Ju-sung sees another cost at work in bailout decisions. "Bureaucrats tend to try to minimize the cost of failure of the administrative decisions they make," said Mr. Chun, who teaches economics at Ewha Womans University. "In the process, they overestimate the economic costs to taxpayers or the market."



by Suh Kyoung-ho




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