HEADLINE: Corporate credit crunch may dampen economic growth
BYLINE: By Kwak Young-sup Staff reporter

Last Thursday, Cho Hung Bank and other creditors of Ssangyong Motor Co. extended an emergency loan of 150 billion won to the carmaker under a debt workout program in an attempt to pull it out of a liquidity crunch.
Although the creditors claim Ssangyong is in temporary financial trouble due to a recent labor strike, industry sources say that the company has fallen a prey to a severe cash drought now gripping the nation's mid-sized conglomerates and companies.
With few signs of an immediate improvement in sight, some experts say that a prolonged liquidity crisis at mid-size corporations may throw cold water on the sustained growth of the economy, which has already been slowing down in recent months.
"Unless the government takes a more fundamental approach toward problem, the liquidity problem could emerge as a big stumbling block to the continued growth of the economy," an analyst said.
In its latest report on the Korean economy, Merrill Lynch also warned that the paralysis of the local bond market may set off a vicious cycle of difficulty in refunding corporate bonds, a rise in business failures, a jump in unemployment and a subsequent economic slump.
The Korean stock market may become more volatile in coming months and stock prices may nosedive, the U.S. securities brokerage cautioned, adding that it is urgent for the Korean government to engineer the recovery of the bond market.
In a report on the economic outlook for the second half, Daishin Economic Research Institute recommended Monday that local financial institutions increase their cash holdings because the corporate credit squeeze may worsen in July and August.
The think tank said that financial instability would escalate further since a large amount of bonds issued by mid-size conglomerates will come due in the two months, and banks and investment trust companies will be required to disclose their potential bad assets and clean them up.
In contrast to the pessimistic view, other experts predict that the current liquidity drain will not lead to a financial turmoil since a demand base for corporate bonds is likely to expand considerably in two to three months.
In a report released Sunday, Sejong Securities Co. forecast that the ongoing liquidity drain could send a handful of marginal firms out of the market in June and July but that the shortage would ease considerably from August.
Mid-size business groups unaffiliated with the top five chaebol have a total of 10.6 trillion won worth of bonds falling due between June and December. Of the total, some 40 percent will mature in June and July, raising the possibility that cash-strapped firms may go bankrupt during the two months.
But Sejong predicted that banks will gradually increase lending to corporations because domestic companies' financial health has improved considerably compared with two years ago and banks have plenty of funds to lend.
Barclays Capital, a British financial firm, also expressed an optimistic view. In a recent report, Barclays said that Korea will be able to solve its financial problems such as a credit drain and turmoil at investment trust companies.
The British financial company said that domestic banks with ample liquidity are expected to the increase their lending to the corporate sector, which will in turn help slow down the pace of an economic downturn. Trouble in refundingAt the heart of the liquidity drain is the fact that companies find it difficult to roll over maturing bonds and commercial bonds as merchant banks and investment trust companies, or major buyer of corporate debt instruments, are in financial trouble as well.
"Financially weak merchant banks and investment trust companies cannot provide liquidity to the corporate sector because of their own problems," a commercial bank official said on condition of anonymity. "Corporations except for good-credit affiliates of Samsung, LG and SK groups find it almost impossible to refunding their maturing debts no matter how high yields are offered." In the wake of their heavy exposure to the failed Daewoo Group, major investment trust companies themselves have received huge public fund injections and are struggling to turn themselves around. In addition, merchant banks, another key providers of short-term liquidity to corporations, are in a bind following a liquidity crisis at Korea Merchant Banking Corp.
To maker matters worse, commercial banks with ample liquidity are extremely leery of lending money to corporate borrowers in their bid to raise their capital adequacy ratios at the end of June.
Although commercial banks are full of cash, they appear to have little room to buy corporate bonds and commercial paper because they are required to meet the capital adequacy ratios recommended by the Bank for International Settlements at the end of June when their accounting books are closed for the first half, an official at the Bank of Korea said.
Under a new asset-quality standard called forward-looking criteria, commercial banks will be required to disclose potential problem assets, or those which are performing now but likely to turn sour in the future. "Although bank deposits have been on the sharp rise this year, banks are getting more reluctant to extend loans to what they perceive as risky firms because of the tightened regulations, aggravating the money drain," the central bank official said.
According to industry sources, deposits at commercial banks have surged about 20 trillion won this year, while merchant banks and investment trust companies have seen their deposits plunge 2.2 trillion won and 31 trillion won, respectively. Industry sources say that the surprise debt workout early this month of the Saehan Group, or the 27th largest conglomerate, has also further fueled the credit crunch, together with a brief liquidity problem at Hyundai Engineering and Construction Co., the construction arm of the nation's largest conglomerate Hyundai last month.
The sources say that the current credit squeeze may reach a critical point in July when about 5 trillion won worth of corporate bonds will come due because the bulk of the maturing bonds have credit ratings of below double B. "Unless the maturing bonds are rolled over, issuers will have serious financial difficulties," an analyst said.
Corporate bonds maturing during the latter half of this year total about 31 trillion won, about 50 percent more than the amount a year earlier. About 35 percent of the maturing bonds are below investment grade, a dire implication that many cash-strapped mid-size companies may be thrown into bankruptcy. In the first five months of this year alone, mid-size conglomerates expect for the top five have succeeded in refunding their maturing bonds worth only 2.7 trillion won, while they have had to pay off 7.8 trillion won worth of maturing bonds.
The escalating credit drain has promoted the government to come up with a package of countermeasures. The capital market stabilization measures announced last Friday, calls for establishing a 10-trillion-won bond fund to expand the demand for corporate bonds and allowing banks to sell short-term products aimed at stemming fund outflows from their trust accounts.
Investment trust companies will also be allowed to sell tax-exempt products in an attempt to lure funds, while the government yesterday decided to inject public funds into ailing merchant banks to help them buy corporate bonds.
Calling the steps stopgap, however, critics are suspicious over their effectiveness. "The government should not solve the problem with makeshift measures," an analyst said. "Instead, it should put top priority on eliminating the instability of the financial market by restructuring the nation's financial and corporate sectors transparently and fast."