Where Does Gov’t Stand on Liquidity Crisis?

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Where Does Gov’t Stand on Liquidity Crisis?

The government’s countermeasures for the current economic issues facing the nation are raising eyebrows - the administration is rushing to come up with stopgap solutions. In particular, it’s hard to get a grip on the government’s principle in its countermeasures to Korea’s cash crunch.

As uncertainty spread through financial circles, the government hurried to scold banks to raise funds worth 10 trillion Korean won to invest in bonds, while providing capital to merchant banks in haste.

On June 26, the head of the Financial Supervisory Commission said that "there would not be much of a reduction in manpower and organizational structure," even if the banks that have received a public fund injection do merge into holding companies. Furthermore, he said that if the banks and labor unions oppose the merger, it would not be forced upon them.

It would be impossible to merge three banks without reorganizing the overlapping human resources and infrastructures or to lead the voluntary merger of other banks. The fund to buy bonds, in fact, forcibly requires the banks to lose money. It is certainly a contradiction when the government requires them to meet the BIS capital adequacy ratio on the surface, by forcing the banks to lose in the bottom line. The financial support for merchant banking companies is also a violation of the government’s policy of providing no support for financial institutions.

It’s understandable that the countermeasures would change in step with changing circumstances. However, the government does not even keep the basic tenet regarding economic policies. Furthermore, the stopgap measures carry the possibility of serious aftereffects. Some investors point out that the recent countermeasures of the Korean government remind them of the stopgap actions for Hanbo and Kia before the foreign exchange crisis.

Due to the insecurity surrounding the nation’s credit crunch, not only are companies frantically looking to secure capital, but so are smaller neighborhood stores. Some people are reportedly so overcome with fear that they are withdrawing their savings from banks. The current situation is far more serious than the government believes.

The driving force behind the panic is the uncertainty on the future of South Korea’s economy caused by the government's lack of fundamental economic knowledge and its frequently changing policies.

The financial crunch was aggravated as cash flow on the market started to turn over in the short term, despite sufficient cash reserves, due to distrust in government policy. However, the government failed to accommodate the situation, despite the fact that its countermeasures should be focused on this issue. It is possible to overcome the immediate dilemma, but another predicament is likely waiting in the wings.

The most urgent issue is to recover trust by resolving all the uncertainties. The government must propose a clear plan and obey the principle of it without faltering. First, it is urgent to raise additional public funds rather than obsess on the unlikely collection of injected funds. The government must raise a sufficient amount of additional public fund with the approval of the National Assembly to start a full-scale recovery.

At the same time, the financial restructuring process must be advanced promptly. The financial institutions with severe problems must be expelled in a decisive manner, while the ones with temporary difficulties be fully supported.

The government’s determination is equally necessary in its corporate restructuring measures. That is the only way to prevent financially solid companies from being affected. It will be difficult for the economic advisors under the current government to change their logic and contradict their policies, which have been carried out throughout this administration. If an epochal transition in policy is impossible for the government, at least replace the economic advisors.

by Um Sung-jik

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