Korea's Daewoo Saga: A Test of Reform Will

The international banks that lent heavily to South Korea's troubled Daewoo group are complaining of unequal treatment, as the government struggles to implement market-oriented discipline it claimed to have adopted after the 1997 crisis. At the center of the issue is Daewoo's unsustainable debt, with a gearing ratio of 500% and interest expenses nearly double its operating profit. The government's reluctance to enforce restructuring has allowed the company to continue operating with inflated asset valuations, posing significant risks to the financial system and economy.

Key Takeaways:

The Daewoo group has a gearing ratio of 500% and interest expenses almost double its operating profit, making a sale of assets to reduce debt inevitable for survival.
The government initially gave Korean banks freedom to oversee Daewoo's restructuring but has since handed responsibility back to the company, which has been reluctant to sell good businesses and willing to dispose of bad ones at inflated prices.
Korea's chief financial supervisor suggests restricting collateral to banks providing new loans, rather than rolling over existing debt, but this would ease pressure on Daewoo to restructure.
The government faces criticism for discriminatory treatment of foreign lenders, who claim they have been deprived of adequate information about Daewoo's financial position and excluded from discussions about the company's future.
The longer the government delays restructuring, the greater the risk of a fresh contagious loss of confidence in the domestic financial system, decreased medium-term growth prospects, and even a renewed crisis.
Foreign investors, who have been net sellers of Korean equities in 1999, are voting with their feet, sending a clear message to President Kim Dae-jung to stay the course on reform.

Statistics:

Daewoo's gearing ratio: 500%
Daewoo's interest expenses: nearly double its operating profit
Amount of debt: billions of dollars
Net sales of Korean equities by foreign investors in 1999: as a whole

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