[EDITORIALS]A misguided debt relief plan

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[EDITORIALS]A misguided debt relief plan

About 140,000 small private entrepreneurs who have been labeled credit delinquents will be granted a grace period to repay their debts. Those whose businesses show potential for recovery will be given financial support of up to 20 million won ($20,000) from banks. These are the proposals the Ministry of Finance and Economy delivered to the Blue House yesterday for assisting credit delinquents who depend heavily on their private businesses for their livelihood.
Korea’s 3.6 million credit delinquents are a major burden on society. Small private entrepreneurs in particular, who proliferated after the financial crisis of the late 1990s, have become the economy’s Achilles’ heel. The Finance Ministry stressed that its measures were practically inevitable. If the private entrepreneurs manage to recover, the measures will prove a win-win situation, as banks collect on loans that are now insolvent. This would further help the economy recover.
But on the other hand, the proposal could lead to further moral hazard. The plan places all responsibility for the insolvent debts and the delinquents’ financial support on banks. The ministry takes the position that it would not be involved in banks’ decision-making when it comes to financial support.
But nothing can be done unless the insolvent debts held by the financial institutions are transferred to the Credit Counseling & Recovery Service or the Korea Asset Management Corp. Whether the government would intervene to execute the plan is in doubt. Already, foreign banks do not want to be involved, and domestic banks are objecting to government intervention and questioning the plan’s validity.
The right idea is to offer support after restructuring; providing it beforehand to a company that has already reached its limit would only delay restructuring. The proposed plan could result in repaying loans with borrowed money, and granting extensions until the economy recovers. What’s more, street vendors, who are in the worst shape, are not even eligible.
To avoid the moral hazard, the government should keep to its promise not to intervene in financial institutions. Forcing credit delinquents onto banks to revitalize the economy would eventually burden the public as a tax. The ultimate solution lies in revitalizing the economy as soon as possible. For this to happen, the government should honestly follow market principles.
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