NY TIMES
August 18, 1999
The Dismemberment of Daewoo
or most of the past 40 years the South Korean economy has been
dominated by the chaebols, a handful of conglomerates with
political connections that gave them access to cheap capital. Many of
them expanded willy-nilly into new industries, seeking growth and
assuming that profits would eventually follow.
The chaebols succeeded in growing very large, but they did so with
relatively little equity and a lot of debt. They seem to have assumed that if
things went wrong, the Korean Government would bail them out. That
was probably true in the past, but now it is not. Daewoo, one of the
largest of the chaebols, is being forced to sell off most of its subsidiaries
to pay debt.
It is encouraging that the Government of Kim Dae Jung did not come to
the rescue of Daewoo, although the failure will cost the Government
plenty as it bails out some of the banks and other domestic companies
that lent to Daewoo. Daewoo employs 150,000 workers, and accounts
for about 5 percent of the country's economy. Some of those workers
are going to lose jobs, and Korea's recovery from last year's financial
crisis may be set back. But the alternative of propping up the company
would only have delayed the pain.
As Daewoo is broken up, it is virtually certain that the company's assets
will prove to be worth less than the huge debt -- estimated at around $50
billion -- that it has built up. That means losses for creditors, and it is
important that those losses be fairly shared. So far, however, foreign
creditors have been largely kept in the dark while domestic creditors --
many of them controlled by the Government -- have seemed to have
better information and more influence. Korea's reputation will be hurt if
the process of dismembering Daewoo is not a fair one to all creditors. |
