Insolvency Crisis and Private Wealth Constributions

Chung Mong-hun, Hyundai Group chairman, announced that he would contribute his private shares, amounting to $89.7 million, and $1.52 billion worth of affiliates' shares as security to resolve the insolvent financial condition of Hyundai Investment Trust and Securities as a result of the tug-of-war with the government. If increases in assets and foreign investment are not effective, the securities will fill the insolvency problem. The government showed a positive response and the crisis surrounding Hyundai Investment Trust and Securities has established a rough foundation for its resolution. However, considering the shock in the financial market created the Hyundai crisis, it is still fortunate that the situation shows signs of settling down.

Now, Hyundai must hurry the operation of management reform. Although the worst part is over, the insecurities of Hyundai investors remain. Hyundai must resolve the insolvency of Hyundai Investment Trust and Securities as soon as possible in order to ease all doubts. Moreover, the problems regarding the management structure of the group must be improved in the near future to regain the trust of the market. If Hyundai considers this normalization plan as a temporary measure to escape a serious dilemma, there will be a critical evaluation by the market.

The government must make efforts to indirectly support the process of normalization. The government must reconfirm Hyundai's normalization plan in order to avoid a repeat of the insolvency of Hyundai Investment Trust and Securities. Moreover, the government must confirm the feasibility of Hyundai's proposal and check if the assurances provided by Hyundai are reasonable. Furthermore, the government must act with fully responsible to ensure that the Hyundai crisis would not become the responsibility of the Korean people. If the insolvency of Hyundai Investment Trust and Securities is not resolved properly, financial restructuring, the most important issue of our economy, will never be possible.

On the other hand, we urge the government to set up clearer principles regarding the insolvency of a company as well as contributions from private wealthy owners. It is very clear that Hyundai should have prepared a resolution to the problem before the crisis became extremely serious. Because Hyundai hesitated too long before the private contribution was made, the meaning of private wealth contribution was already lost.

However, the government's attitude is certainly not fair, since the government takes advantage of populism with regard to private wealth contributions when an insolvency crisis become an issue. The government had taken advantage of public opinion and indirectly threatened for the contribution of private wealth. Although the government always denies 'management-ownership system,' the government always relies on the owners whenever urgent issues come up. It is nothing more than the lead of the government that Hyundai provided $1.52 billion worth of shares from group affiliates as security. This can damage the small shareholders, but the government pushes for this decision without consideration.

It is extremely significant that the system to prohibit the dictatorship by owners should be strengthened in order to resolve these problems. However, the government must be aware that it should not resolve insolvency crisises through contributions of private wealth without appropriate reasons. Similar disputes will no longer be raised, when the government becomes aware that its fundamental strategy to sacrifice certain designated companies to resolve an insolvency crisis is no longer a rational economic theory.

by Cheong Jae-wal