QE mulled to save firmsAs the corporate restructuring of shipbuilding and shipping companies suffocating under huge amounts of debt gains momentum, the biggest question is how the finances needed to undergo such a major task will be created.
Currently, the government is looking into raising the capital at state-run financial companies, including Korea Development Bank (KDB) and the Export-Import Bank of Korea (Korea Eximbank), that hold a majority of the debts owed by the shipbuilders and shipping companies via Korea’s own QE (QE), especially since President Park Geun-hye on Tuesday said she is in favor of such approach.
The loan that KDB and Korea Eximbank provided to major shipbuilders and shipping companies amounts to 21.2 trillion won ($18.4 billion). Daewoo Shipbuilding & Marine Engineering owes 13 trillion won to both banks, while Hanjin Shipping owes 750 billion won.
However, these two state-run banks already have a huge debt-to-capital ratio, which would only worsen when the corporate restructuring starts. KDB’s debt ratio is 811 percent, while Korea Eximbank’s debt ratio is 644 percent.
“The impact on commercial banks is expected to be limited, since these banks have been pre-emptively deleveraging on industries sensitive to the economy [such as shipbuilding and shipping] since the global crisis [in 2008],” said Eun Kyung-wan, an analyst at LIG Investment & Securities.
“In fact, despite the ratio of insolvent bonds rising in late 2015, the commercial banks and local banks’ soundness index has been stabilized, whereas the state-run companies have a relatively higher exposure while their soundness will be burdened.”
One way to create the funds needed for corporate restructuring while maintaining the soundness of these banks is for the Bank of Korea to make direct investments in Korea Eximbank, in which it is the second-largest shareholder with a 13.1 percent stake.
The other option is to use the central bank’s right to print money to start Korea’s own QE. The central bank will buy up mortgage-backed securities issued by the Korea Housing Finance Corporation as well as special government bonds issued only by KDB. This idea was initially proposed by the Saenuri Party during the general election campaign earlier this month.
However, in order to do so, the government needs to reform the law on the Korean central bank that bans it from investing in bonds other than those whose principles are guaranteed by the government.
For the central bank to invest in other state-run financial companies, other than Korea Eximbank, or invest in other state-run financial companies’ bonds, the government would need to revise the law.
The biggest questions are whether the central bank will take part in QE and whether the opposition party will help in revising the law. Both options are seen as unfavorable.
There have been arguments that changing the central bank law to allow it to invest in other state-run companies will only harm its independence from the central government.
In addition, although the opposition party agreed on the necessity for corporate restructuring of debt-ridden industries, it is against QE, noting that the liquidity provided could be spent on insolvent conglomerates, which could be seen as favoritism to larger companies.
The Blue House argued Wednesday that the current QE is different from those adopted in other major economies including Europe and Japan and stressed that it is necessary.
“The Korean QE is out of necessity, with a special purpose of selective restructuring, and this is different from the Japanese indiscriminative QE that was adopted without asking any questions, as it has reached a point where it can leave no room for additional cuts on its interest rates,” a Blue House official said.
BY LEE HO-JEONG [firstname.lastname@example.org]