In the time of a national economic emergency, governments are inclined to take extraordinary measures to save the national economy. Situations could require drastic steps and direct intervention by agencies.
A responsible government would probably see it as discharging its official duty. As the failing shipbuilding industry puts a new question mark over the prospect of the nation’s economic recovery, the government is scrambling to arrange debt restructuring for these companies through government-owned banks.
The term “debt restructuring” brings back bittersweet memories for many of us in Korea. In the wake of the 1997 financial crisis, almost 100 major companies underwent creditor-approved restructuring. Debt restructuring was one of the features that defined the post-financial crisis Korean economy.
The government enacted special legislation for debt restructuring and creditor banks made decisions. The restructuring was largely successful: Companies turned around and creditor banks minimized their losses. The scheme was a catalyst for the country’s recovery from the financial crisis. That is the sweet side of the memories.
On the bitter side of the story, debt restructurings triggered trade disputes with other countries, who claimed that government-orchestrated rescue plans violated Korea’s obligations under trade agreements. In some disputes Korea prevailed, but in others it did not. While the major wave has passed, live embers are still under the ashes and keep emerging even today, from time to time, like a whack-a-mole game.
So, when the government now floats the idea of debt restructuring for struggling shipyards, both the sweet side and bitter side of the past experience should be reflected upon. Unfortunately, present national discussion is mostly about the dire situation of the shipbuilding companies and the consequences of their failure on the national economy. There is hardly any discussion on the bitter memories and the hard-learned lessons from the previous restructuring.
The lesson from these 20-year experiences was that government agencies should not directly intervene in a decision on debt restructuring. Its role instead should be the regulator of the market and regulator of financial institutions. The ultimate decision of debt restructuring and the specific portfolio of any such action should be reserved for the creditor banks.
This lesson tells us that a key criterion is to ensure that restructuring is as commercial as it can be. The legislation that regulates debt restructuring (called Corporate Restructuring Promotion Act) is the outcome of Korea’s long experience in this regard. The act separates the procedure into two categories.
The first category is for the creditor banks. They should make their decision based on commercial considerations. Their only focus should be how to recoup their credit extensions and loans from the recipient failing companies. The second category is for the government: how to monitor the proceeding as the regulator of the market. So, the existing legislative scheme already reflects Korea’s hard-earned lessons over the past two decades on this issue and is framed to implement debt restructuring in a proper way.
Debt restructuring of shipbuilding companies should be implemented in this manner in order to be defensible from the criticism of other countries. Given the fierce competition in the shipbuilding industry in the global market, it is almost certain that many countries are watching the recent move in Korea with wary eyes.
It is a rather surprising move, to say the least, that government agencies appear to spearhead recent discussions of debt restructurings of shipbuilding companies. Even the Bank of Korea is now being mentioned to provide financing to government-owned banks participating in the restructurings. Again, foreign trading partners will look at this development with a great deal of interest. This would implicate trade agreements’ provisions in many places.
People cry for the government to intervene in the market and do something to save major companies from their crises. When governments do intervene, they have to abide by certain rules under treaties.
Lee Jae-min is a professor of law at Seoul National University. — Ed.