[EDITORIALS]Broken financesThe domestic financial market is in turmoil. While the prosecution expands its investigation into business conglomerates’ slush funds, the insolvency of LG Card Co. is also in the news. It has sent the exchange rate of the Korean won against the U.S. dollar plummeting and stock prices are also dropping. Although the crisis at LG Card Co. is over, the uneasiness of investors is spreading to creditors, major shareholders of credit card companies, brokers and investment and trust companies that hold bonds of card companies. Money is flowing out of these financial institutions. The insolvency of LG Card Co. has also affected overseas financial markets. Hyundai Motor had to postpone its bid to raise foreign capital for investment in its plant in Alabama.
The reason the financial sector is stirred up is that the investors see the measures for LG Card as a temporary remedy and think the chances of a recurrence are great. The insolvency of LG Card has expanded to the whole financial sector, and repeated failure of government policy on card companies has made distrust in the government deeper.
Under the circumstances, it is not likely that the financial markets will regain confidence easily without a fundamental fix. Investors have reason to worry that when card companies go insolvent, banks and other financial institutions will go insolvent as well, ultimately leading to government bailouts. Uneasiness in financial markets will also delay the economic recovery and that will create more credit card defaults and aggravate the finances of card companies further. A vicious circle indeed.
Although LG Card Co. is trying to recover, job cuts will not be enough to turn a profit. The government should provide a master plan for reforming the credit card business in general after consultation with creditors. The recent problems involving the insolvency of a credit card company and 3.5 million persons with bad credit have to do with government policy that encouraged the use of credit cards as a means of boosting the economy. The government aggravated the situation with a series of temporary remedies.