Daewoo's Debt Crisis: Foreign Banks Hesitate to Roll Over Loans

Strategic Insights -

The fate of South Korea's second-largest conglomerate, Daewoo, hangs in the balance as foreign banks decide whether to roll over the company's short-term debt. The government's decision to allow creditors to take over Daewoo's restructuring has sparked a cautious response from foreign lenders, who are demanding collateral and raising concerns about the government's liability for Daewoo's offshore financing. With a total foreign debt of $9.9 billion, including $3.1 billion borrowed from foreign banks in Korea and $4.58 billion arranged by foreign banks offshore, Daewoo's debt crisis has become a major concern for the government.

Key Takeaways:

  • Foreign banks are facing a dilemma about rolling over Daewoo's short-term debt, with some suggesting that the company should provide collateral.
  • Daewoo's biggest foreign lenders, believed to be European and Japanese banks, are likely to roll over loans, while banks with smaller exposure will not.
  • The government has angered foreign banks by stating that it is not liable for Daewoo's offshore financing.
  • The Financial Supervisory Commission is confident that foreign banks will comply with the government's wishes on debt restructuring.
  • Although creditors planned to liquidate Daewoo's collateral and use the funds to support the group's core units, a US trade official warned that the government's financial rescue of Daewoo might provoke a trade row.
  • A US under-secretary of commerce for international trade, David Aaron, cautioned Korea to avoid subsidies for exports, particularly in sensitive areas like steel, semiconductors, and cars.

Statistics:

  • $5.5 billion: The amount of short-term debt due this year that foreign banks are considering rolling over.
  • $9.9 billion: Daewoo's total foreign debt.
  • $3.1 billion: Das of foreign debt borrowed from foreign banks in Korea.
  • $4.58 billion: Das of foreign debt arranged by foreign banks offshore.
  • $1.57 billion: Das of foreign debt from overseas branches of Korean banks.
  • $690 million: Das of overseas bond issues.

Sources:

  • Financial Times, "Daewoo's debt crisis threatens Korea's stability," 1999.
  • Seoul: Samsung Securities, research head Namuh Rhee, quote.
  • US Commerce Department, under-secretary for international trade David Aaron, quote.