Gov’t and BOK still at odds over restructuring

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Gov’t and BOK still at odds over restructuring

Tensions between the government and central bank over how to finance the restructuring of the debt-ridden shipbuilding and shipping industries flared again, not long after the two sides seemed to have patched up their differences.

“We have come to agreement that although there will be no immediate problem in proceeding with the restructuring, considering the favorable condition of the state-owned banks including the BIS ratio, said Choi Sang-mok, first vice minister of strategy and finance, on Thursday, “there is a need to secure finances for the banks as a preemptive measure to prepare for any possible financial instability that may occur,”

Choi spoke after a special task force of the Finance Ministry, the Financial Services Commission and the Bank of Korea held its second meeting in two weeks.

“In more specific detail, we have looked into using direct and indirect investment,” Choi said. “[the latter] is through a bank recapitalization fund so that we can act flexibly to a changing situation of the restructuring process.

“We have also discussed details of how [the recapitalization fund] will be managed including the size, the period it will be used and how it will be retrieved.”

The fact that direct investment is on the table suggests the central bank is open to the idea of financing the state-owned banks, which it previously strongly opposed.

But later Thursday, the central bank said otherwise and repeated its earlier position.

“We are not considering the possibility of a direct investment,” said a BOK official. “In order to mobilize [the central bank’s] note issuing authority, it first needs to have a public consensus that the situation is a crisis, as it could bring about confusion in the financial system.”

The government has been trying to force the central bank to bankroll the state-owned banks who are main creditors of the troubled industries, in what it calls Korean style quantitative easing.

The so-called Korean-style quantitative easing would focus on restructuring of ailing corporations and Korea’s household debt problem instead of generally stimulating spending and the economy as in the West and Japan.

The main idea, first described during the campaign for the general election last April 13, is that the central bank could print new money to buy bonds from the state-run Korea Development Bank, which would lend more money to troubled corporations and industries to help them restructure themselves.

The central bank has been reluctant to directly invest in the state-owned banks by printing money as it would be impossible to get back the investments.

The central bank has made it known that it prefers an indirect approach of creating contingent convertible (COCO) bonds, which would be a type of loan and would have to be repaid.

COCO bonds are considered a useful tool for enhancing the soundness of financial institutions’ assets, as the principal money can be converted into stocks of the institution if the bonds cannot be repaid.

Even with the COCO bonds, the central bank is asking the government to guarantee such loans, which the government is reluctant to do because they will be categorized as national debt.

Although Korea’s national debt-to-GDP ratio is much lower than other advanced economies including the U.S. and Japan, the Park Geun-hye administration has trying to keep it from rising.

Meanwhile, the Korea Development Bank is said to be preparing to issue 700 billion worth of COCO bonds this month. The market estimates that the government would need to come up with between 5 trillion and 10 trillion won for the restructuring.

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