Avert another liquidity crisis

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Avert another liquidity crisis

Local markets are rattled with rumors and scared by the possibility of more corporate bankruptcies after the country’s 29th largest conglomerate, Tongyang Group, filed for court receivership for five affiliates.

The market already is betting on which companies could go down next. Companies with credit ratings below “A investment grade” cannot sell their bonds and commercial paper.

Some have given up on issuing debt and settle for interest rates of over 10 percent. The capital market may be looking at a liquidity crisis. According to the Bank of Korea, of the 8.3 trillion won ($7.7 billion) worth of corporate bonds that mature during the first half of 2014, 83 percent are from below A-grade corporate issuers. If the freeze continues in the capital market, chain insolvencies may be inevitable. Authorities must hasten to ease market jitters amid a slow economy and repercussions when the U.S. Fed begins to phase out quantitative easing.

The Tongyang case must be settled first. Of the 40,000 individual investors, authorities must arrange adequate compensation. The Financial Supervisory Service launched unlimited in-depth auditing for the first time in 15 years into the Tongyang Group in order to help precipitate settlement of the crisis. It must delve into any wrongdoings or mismanagement by the owners and managing executives. Employees already have complained that they were been forced to buy shares in their troubled companies. Union employees claim that Lee Hye-kyung, vice chairman of Tongyang Securities and daughter of the group’s founder, withdrew billions of won from an account at Tongyang Securities just before the group filed for court receivership. If the FSS cannot fully investigate, the prosecution must join in to get to the bottom of the case.

At the same time, financial authorities must strive to prevent a freeze in the debt market. They must consider expanding the fast-track acquisition of corporate bonds being introduced in August. They must increase the bailout scale from the current 6 trillion won limit to prevent relatively sound companies from defaulting on their loans.

Authorities must accelerate corporate restructuring. Rumors of financial difficulties at debt-ridden companies have been around a long time. Some of the names - Woongjin and STX - indeed went insolvent. Market jitters and skepticism worsened because authorities dragged their feet on restructuring in fear of delaying economic recovery. But restructuring should not be deferred because doing so could lead to a bigger economic disaster.

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