The easy way or the right wayThe Korea Development Bank (KDB) was established in 1954 to direct funds to rebuild a country devastated by the 1950-53 Korean War. It financed the founding of steelmaking and shipbuilding facilities in the 1960s and ’70s and incubated the automobile and electronics industry in the 1980s. All of these industries were risky bets at the time. Commercial banks could not easily pour astronomical sums into them. If not for bold risk-taking and generous parenting by state entities, Korea Inc. could not have made its impressive advances. The Export-Import Bank of Korea (Korea Eximbank) also contributed in a big way, coming up with funding for trade financing, overseas investments and resources development.
State banks were created to serve a public purpose. Commercial banks must lend based on strict calculation for returns. State funding is needed for projects that might lose money in the short term but have important roles in the long run. A developing economy cannot be entirely left to private financial institutions. State banks must ensure money flows into various parts of the economy that would otherwise be neglected. From the 2000s, state banks have functioned to spearhead corporate restructuring. They still look after the economy with a broad frame, taking up messy and complicated jobs that commercial banks aren’t interested in.
KDB lent 4 trillion won ($3.4 billion) and Korea Eximbank chipped in 8.99 trillion won to Daewoo Shipbuilding & Marine Engineering. The shipbuilder last year reported an operating loss of over 5 trillion won. Its debt overwhelmed capital by 7,300 percent. The shipbuilding industry is struggling to stay afloat amid weak global demand and depressed oil prices. Restructuring is unavoidable.
Banks must set aside loss reserves when they see serious risks in their portfolios. Otherwise the banks, too, can run into trouble. If a bank’s liquidity situation is questioned, customers will rush to take out their savings, causing a bank run and domino effect in the financial sector. In 1997, corporate troubles spilled over to banks and turned into a full-blown financial crisis.
The two state banks, therefore, need quick recapitalization. They must build up their ammunition to prepare for the challenge of rebuilding ailing industries and companies. The question is how. A plausible option was the so-called Korean version of quantitative easing. The Saenuri Party came up with an inventive campaign promise of having the central bank print money to fund corporate restructuring. The idea automatically died when the ruling party lost the April general election by a landslide.
But President Park Geun-hye resurrected the idea during a meeting with editors of media organizations. Yoo Il-ho, the deputy prime minister for the economy, immediately took it up. There are two ways to bolster capital in state banks. The money, first of all, can come from national coffers. But the problem is that this year’s budget has already been set. The government would have to issue new debt and create a supplementary budget, and this would require approval from the National Assembly, where the liberals are about to take control.
Money can also come from the central bank’s printing press. As the central bank’s sovereignty is legally ensured, the Bank of Korea’s action does not need any legislative endorsement. The Bank of Korea, as a shareholder of Korea Eximbank, can up its stake through new investment. The Bank of Korea law would have to be revised to allow it to invest in KDB.
Whether the money comes from the government or the central bank, the bill goes to the people at the end of the day. Government debt would have to be covered by the taxpayers, and a spike in government debt could demand a hike in taxes. The whirling of the printing press at the central bank could stoke prices. To the people, higher prices are no different from higher taxes.
The deputy prime minister prefers the easy way, but it is not the just way. Last week, he said capitalizing the state bank should come from public finances, but that economic policy can change according to economic conditions. He admitted that it is the government’s responsibility to run a state bank. Making the central bank do the job is simply wrong.
Cleaning up so-called zombie companies has become imperative in order to revitalize the economy. The people all agree to this need. The government should turn to the National Assembly, which represents the will of the people, to seek its support. Economic officials want to skip the procedure, saying there is no time to lose. A bailout of Daewoo Shipbuilding & Marine Engineering alone would cost at least 5 trillion won. The government must seek understanding from the people first. It is underestimating the people if it thinks they won’t be bothered with gradual rises in prices.
The universal bottom line is that the central bank should serve as the “lender of last resort.” Its monetary policy must serve the national purpose and should not be wasted to support a certain industry or company. It would set a poor precedent, as the government could be tempted to turn to the central bank every time a major company runs out of money. The government should go the legislature, not the central bank.
JoongAng Ilbo, May 11, Page 28
*The author is head of the international business news team at the JoongAng Ilbo.