Does the Government Have a Firm Grasp on the Cash Flow Crisis?The government’s understanding of the essence of current insecure financial conditions is highly suspect. With feelings of insecurity rapidly spreading out from companies due to the severe lack of cash flow, the government has not only been one step behind in its attempts to resolve the problem, but it has also consistently acted in an extreamly reactionary way.
Yesterday, the once again government announced plans to allow the sale of trust products to guarantee initial investment as well as support liquidity in the market. However, this move still fails to be a fundamental resolution for the credit crunched market. This move is only acts to extinguish the economic fires thanks to immediate and urgent demand. We can not stop worries that the current condition might become aggravated since the government has repeated its use of short-term countermeasures following the initial plan to raise 10 trillion won in funds to buy corporate bonds.
The recent cash flow crisis has not been caused by a lack of sufficient cash in circulation, it is mainly caused by the fact that the cash in the market is not circulating according to need. In this year, the savings amount at banks has increased to 50 trillion won due to money being transferred from investment and trust companies to banks with a solid financial base.
The banks, however, have been preparing to strictly follow the standards for issuing of loans using the BIS (Bank of International Settlement) capital adequacy ratio by the end of June. Therefore, many companies are failing to meet the bank standards to obtain loans. Furthermore, even companies in a sound financial condition are suffering from a lack of cash flow since investment and merchant banking companies have failed to play their appropriate role when purchasing commercial papers and corporate bonds.
Since corporate bonds worth 30 trillion won will mature between July and the end of the year, a serious cash flow crisis is certainly possible if there are no appropriate countermeasures.
The government must carry out integrated and multi-dimensional countermeasures to correct the distorted cash flow structure and come up with a long-term vision rather than short-term solutions. The most urgent issue is the recovery of trust for the government.
The market has already bottomed out in its trust for the administration’s current economy team. The government‘s new plans are likely to lead to the possible insolvency of investment companies and merchant banks. It is impossible to understand the government＇s misjudgment on this matter since it already missed the opportune time for prompt countermeasures due to its concentration on the general election and then the South-North summit, leading to the current cash flow crisis. We must request that the government comes to an accurate understanding of the current conditions along with the landmark reform of consciousness needed to resolve the predicament.
Moreover, moves to resolve uncertainty about the future are definitely needed urgently. Even banks in a solid financial condition avoid giving loans because it is extremely hard to predict if a company will survive. The same is true for financial institutions. A lack of consistency in government policy also aggravates the situation.
The government must clarify its principles to support financial institutions and companies and then strictly respect these principles. If circumstances frequently change, like they do now, it is impossible to expect any positive effects from any measures taken. The government must honestly recognize the problems with funding and obtain the cooperation of the National Assembly to raise additional funds to accelerate financial restructuring. Furthermore, banks must make efforts to find the real jems of the market, even if they must create their own techniques to do so. Comprehensive measures are urgently required to resolve the current problem of a possible cash flow crisis.
by Kim Min-sok