Stuck in a parachute trap

“If things go well, it’s all thanks to me. If things don’t work out, blame the president.”

The joke is widely used these days, but I have to use it again for Daewoo Shipbuilding & Marine Engineering.

The second-largest shipbuilder in the world - and Korea’s pride - is shaking. The market estimates a minimum of two trillion won ($1.72 billion) in losses for the second quarter, but the Korea Development Bank (KDB), the major shareholder, says it needs to investigate further to get an exact figure. While people wonder who is responsible for hiding such big trouble, the KDB tries to avoid criticism when it is called into account.

Daewoo Shipbuilding & Marine Engineering has about 20 trillion won in loans. In a liquidity crisis, creditor banks will be affected and shock waves will spread to not just the already dwindling shipbuilding industry but to the economy as a whole. It is a major risk factor. On July 15, the head of the Financial Services Commission (FSC) called an emergency meeting to save the shipbuilder.

Here’s where the president is to blame. In April 2013, not long after her inauguration, President Park Geun-hye selected Hong Ky-tack as the chairman of the KDB and stuck to her choice despite opposition and concern by the public and her aides. A Sogang University graduate, Hong had no experience in finance. He had worked in Park Geun-hye’s election campaign and his wife, Chun Sung-bin, is a close friend of Park’s. Hong has openly said he was “parachuted” into the position.

But the position as head of the KDB is like a field commander in policy financing. It was previously a “governor” position like the head of the Bank of Korea, and was mostly held by vice finance-ministerial candidates. When the KDB functions properly, insolvent companies are weeded out and the national economy runs without trouble. Hong took the office when shipbuilding, marine transport and construction industries were all in crises. It was urgent to start industrial restructuring to thin out zombie companies. If they were left as they were, the national economy would have fallen off the cliff.

President Park and Hong knew the situation well. Upon inauguration, Hong stressed that some conglomerates were faced with liquidity crises, and someone needed to take the initiative to get financial institutions and conglomerates to sign voluntary workout agreements.

The KDB should play that role, he said, practically reading off an answer sheet.

But he soon reached his limit in solving the problem, venturing beyond what he had memorized. Restructuring is a painful process involving confrontations with politicians and unions. A scholar-turned-CEO may have been unprepared. After two years, the KDB has made little headway in restructuring; many financial officials say that Hong is even swayed by working-level officials rather than leading the restructuring efforts.

The Export-Import Bank of Korea, to whom Daewoo owes the most money, is another government-run bank. The chairman of the bank, Lee Duk-hoon is also a member of the “Seogeumhoei,” a gathering of Sogang graduates in the financial industry. President Park initially chose him as the chairman of Woori Bank in March 2014, but when the Blue House officials opposed that nomination, he was made the head of the Export-Import Bank last March. One of President Park’s campaign promises was to have state-run banks help save the struggling shipbuilding industry.

But the Export-Import Bank focused on Sungdong Shipbuilding & Marine Engineering Co. and Daesun Shipbuilding and Engineering Co., which were under the bank’s management. It neglected the desperately needed restructuring through mergers of insolvent shipbuilders. In May, FSC Chairman Lim Jong-ryong insisted that the shipbuilding industry required a wholesale restructuring, not work, to save individual companies. But it was too late.

In the meantime, 21 of the 27 small and mid-size shipbuilders had disappeared, and the remaining six (all but Hanjin) are under debt workouts or receivership. Last year, the five companies had a total of 5.51 trillion won in revenue with 834.1 billion won in losses. But they are still competing against one another to survive. The creditors, led by the KDB and the Export-Import Bank, are pouring in as much as 3 trillion won per company, but it’s like shoveling sand against the tide. The most we can hope for now is to prevent a full-scale economic crisis triggered by the shipbuilding industry.

I believe that the culprits are presidents who view finance as just a tool for lending money to the manufacturing sector and see the leadership of financial firms as trophies awarded by the administration. In the Lee Myung-bak administration, Korea University alums and others close to the president were sent to lead many financial companies, and the choices were criticized as “the worst in history” that “retrograded Korean finance by 20 years.” But the Park administration is even worse. So I have to blame the president, knowing very well that nothing will change.

JoongAng Ilbo, July 23, Page 30

*The author is an editorial writer of the JoongAng Ilbo.

by Yi Jung-jae