Political deadlock holds economy hostage

The turbulent political situation in Korea looks to be heralding yet another crisis in the economic sphere. Should the crippled National Assembly fail to address the supplemental budget bill, repercussions in the financial restructuring reform may be severe. The resolution by the labor unions also seem somewhat troubling.

Many fear the possibility of a second foreign currency crisis should Korea misstep.

There are two major causes for such cause and effect. First, should the National Assembly address the supplemental budget bill as well as other public welfare bills, the restructuring would have to be delayed yet again. Also, foreign investors have been using the political and labor situations to measure the credibility and viability.

Worries of delay in financial restructuring:

Should the public fund allocation be delayed, financial restructuring might turn into an uncontrollable reform effort.

The fund needed is 6-7 trillion won for the four banks under threat, such as the Hanvit, Peace, Kwangju and Cheju; 2 trillion won for the consolidated Korea, H&S, Central and Yeungnam Merchant Banks; 2 trillion won for the clean-up of Hanarum Merchant Banks; 6.9 trillion won for the cooperative consolidation of insurance, financial and credit institutions; 6.6 trillion won for the Seoul Credit Insurance. All in all, 24-25 trillion won is needed.

Among these needs, the most urgent is the public fund injection for Seoul Credit Insurance, which needs the funds to cover the maturing bonds of its insured companies. Seoul Credit needs the public fund to pay for the loan and bond maturity of Daewoo and other companies in the government workout programs.

"We already have asked for several deadline extensions with the creditors, and we are near the end of our ropes," an official at Seoul Credit Insurance said. "If the allocation of the public fund is delayed further, the company issued bond market is going to grind to a halt followed by a severe credit crunch."

Wrinkle in the real economy:

"The banks waiting for the funds from Seoul Credit Insurance to increase its liquid asset to meet with the BIS at the end of the year are feeling anxious," Korea Institute of Finance senior researcher Son Sang-Ho said.

The real economy cannot avoid the detrimental influence from the worsening credit and liquidity crunch.

The nonviable banks and the secondary financial institutions also might be affected by the stalled National Assembly. The government had planned public fund injections for some time next month in order to turn many nonviable institutions into clean banks, along with implementing the partial deposit insurance system starting next year. However, the current standoff has jeopardized such plan.

Repercussion on business restructuring:

Business restructuring and reform also has been left out in the rain. Further delays will only increase the cost of the reform, and many of the viable companies might be brought under. The delay in picking out the rotten apples might cause all others to go rotten.

"Due to the tightened financial market, even the viable companies are feeling pressure," Professor Kang Chul-Kyu at the University of Seoul said. "The government must close down the nonviable ones and foster the circulation of funds through restructuring as soon as possible."

Political deadlock and labor union:

The hint of stronger consolidation by the labor unions as the political situation has hit a wall is causing jitters among foreign investors.

The Federation of Korean Trade Unions (FKTU) held a rally Nov. 19 and the possibility of a comprehensive walkout by the labor union members of Korean Electric Power Corp. is expected Nov. 24. On Nov. 26, a rally by the civil servant arm of the labor union association will hold a rally, and Nov. 29, the Federation of Construction and Production labor unions will hold a rally. Then on Dec. 8, the FKTU is expected to call a nationwide walkout of all its members.

"The 1997 foreign currency crisis was caused partially by the tangled web of the Hanbo crisis, the Kia crisis and labor union activities," Sungkyunkwan University economics professor Lee Jae-Woong said. "Members of both the ruling and the opposition parties need to reflect on how their actions crippling the National Assembly today might be judged historically.¡±