[Outlook]Economic surgeryTwo accomplices to a crime are being grilled in two separate rooms. The police don’t have enough evidence against them, and need a confession. If both prisoners remain silent, both will go free. But their mutual distrust causes each to rush to be the first to betray the other. They each fear that they will be the last one to confess and end up holding the bag. This is the Prisoner’s Dilemma, which shows that what seems to be the best choice for each individual’s self-interest actually ends up leading to the worst result.
These days, Korea’s banks are facing the same problem. If construction companies and other export-oriented firms on the brink lose a source of funds, they will be at risk of mass bankruptcy. Then banks in turn end up suffering from having to absorb too many bad loans. They know this fact better than anyone, but they are reluctant to be the first to start lending money again because they have no idea which companies will survive and which will go under.
In addition, even if a bank consents willingly to a company’s request for a loan, if the money goes into other banks, it is good for nothing. The best choice available to banks is to shut down the loan windows until the sky clears.
This is the reason that banks didn’t move a muscle when the president pleaded with them - no fewer than six times - to roll out bundles of money. The banks do not trust each other, as it is not just a few companies that are facing tough times. The entire economic landscape is changing drastically. No matter how many times the government supplies banks with capital intended for businesses, it is not going to help fix the problem. If the current situation continues, we may even see companies and banks ruined together.
Thus, it is urgent that we separate the wheat from the chaff by liquidating faltering enterprises, no matter how painful it might be to all of us at the moment. We need to allow the improperly run enterprises to fail, so that other companies may be infused with sufficient capital to move forward.
However, I am worried about the negative associations that seem to have been inspired by the convention of large creditors, held by financial institutions in order to restructure the debts of construction companies. It seems that the original purpose - scrapping the parts of the machine that no longer function - has faded away.
Even government officials are pouring out honeyed words, saying that the plan was designed to be mutually beneficial, instead of letting the companies that are on their last legs expire. The construction firms have banded together, leaving the government and banks to struggle to find a way to deal with them.
A similar event happened just before the 1997 financial crisis. A series of bankruptcies ensued - Hanbo in January, Sammi in March and Jinro in April. The bewildered President Kim Young-sam told his economic team to “prevent large companies from going bankrupt.” Financial circles hurried to unveil a clever solution, pledging not to let large companies go belly-up. It was just like injecting a great deal of antibiotics into a patient who needs surgery.
Side effects cropped up immediately. Kia Group, facing bankruptcy, found weak points in the agreement and misused them. It resisted restructuring for as many as 107 days, even as things became more urgent. There is no need to explain how painful the results were.
The convention of large creditors was the first step toward a successful restructuring, depending on how successful we are in dealing with its outcomes. The government should not leave insolvent companies with the misunderstanding that they are going to survive if they resist.
But President Lee Myung-bak is inviting just such a misunderstanding. He intensified pressure on banks, saying, “Do not take away an umbrella on a rainy day.” Of course, what he says is not wrong. But we are deeply worried about how financial institutions poised to restructure the debts of construction firms will understand what he said. There is a real possibility that the wrong idea will crop up in financial circles, and banks might get the message that construction companies should not be allowed to go bankrupt.
Some signs that this may be happening have already appeared. Some people insist on liquidating a few faltering enterprises in order to create a favorable impression, and then encouraging the rest of the construction companies to join the convention. They are trying to buy time by injecting a patient in desperate need of surgery with antibiotics. It would be great if we could save all our patients. However, the antibiotics leave nasty aftereffects.
We spent a huge amount of money on tuition fees a decade ago in order to learn this lesson. We should not make the same mistakes again.
*The writer is a deputy business news editor of the JoongAng Ilbo.
by Jung Kyung-min