[EDITORIALS]Another credit card crisis

The financial difficulties of credit card companies have again surfaced, creating uneasiness. In the first nine months of this year, credit card companies recorded total losses of 3.6 trillion won ($3 billion), and they have to pay back 3.5 trillion won by year’s end. Among them, KEB Card Co., which is heavily indebted, was saved from crisis as it was absorbed into the Korea Exchange Bank. But LG Card Co. cut off cash- advance services over the weekend.
Creditors demand that Koo Bon-moo, LG Group chairman, stand joint surety for an additional loan of 2 trillion won, and offer as collateral his personal holdings in the group’s affiliates, a 5.46-percent stake. But LG Group balked at this, saying that asking its chairman to stand joint surety is like putting up the group’s managerial power as collateral. If the two sides continue like this, it will be difficult to avoid the company’s bankruptcy.
The root of this crisis was in the card companies’ aggressive marketing campaigns, riding on the government policy of encouraging consumption in the aftermath of the foreign exchange crisis. Card companies recruited subscribers on the street and provided excessive cash-advance services. After they were driven to a liquidity crisis last spring, they made efforts at self-help by increasing their capital. As the rate of overdue payments increased with the economic slowdown, another crisis situation was created.
The crisis this time will not stop at LG Card Co. If the company goes into bankruptcy, it will be an enormous shock to the economy. Deposits have been flowing out of investment and trust companies since last week. It means that a ripple effect will spread to the whole financial sector.
The creditors and LG Group must narrow their differences. LG Group must come up with a more sincere self-help plan. The creditors must consider that demanding the chairman’s joint liability guarantee is not reasonable in a market economy. The government must strengthen its effort to reform the credit card business. Card companies must make additional investments and reduce cash-advance services.