Necessary restructuring

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Necessary restructuring

Banks have completed their first round of restructuring evaluations in the construction and shipbuilding industries. Of 111 target companies, only two will not get help through restructuring while 14 will enter debt workout programs.

But the results fell short of market expectations and the reaction was predictably negative. Stocks - even of the ones that survived - tumbled, and interest rates, including that of corporate bonds, went up, reflecting the view that passive restructuring won’t be able to solve uncertainty in the market.

But expectations must be tempered and we must remember that banks generally shun corporate restructuring. When client companies go bust or enter workout programs, banks must set aside between 20 percent and 50 percent of their loans as allowance for bad debts. That drives down their BIS capital adequacy ratio.

We can’t ignore the big picture just because we didn’t like the results. First, the first round of restructuring must be handled swiftly and decisively. Companies subject to workout must either start rebuilding immediately, or receive help in the form of lowered interest rates and investment conversions.

For companies with B ratings - those considered to be suffering from temporary liquidity problems - banks must provide fast-track cash.

Financial regulators and banks said their restructuring focus would shift to other industries starting late this month. And indeed, restructuring can’t be a one-and-done deal and it must take place on a regular basis.

The inherent goal of restructuring isn’t to kill companies but to revive them. You have to sort out rotten apples in the box so that fresh ones can stay that way. If an industry is infected with a few companies that could go down any day, who would want to invest in it? Without restructuring, the financial market can’t be expected to operate smoothly.

Economies around us are deteriorating. Following U.S. firms, European financial companies are also struggling and a global recession is on the horizon. The future of the Korean economy isn’t much better.

The Korea Development Institute predicted minus 2.6 percent growth in the first half of this year, and Fitch Ratings forecast minus 2.4 percent growth for the year. These figures fall well below those for the United States (minus 1.2 percent) and Japan (minus 1.7 percent). At a time like this, we can’t be hesitant when it comes to restructuring. To restore our economy, we need strong and consistent corporate restructuring.
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