Can't change - won't change

"We have to rebuild our credibility with the international market," says Lee Hun-jai, one of the last scions of Korea's ancient monarchy, and as chairman of the recently formed Financial Services Commission the man in the hottest seat in Korea's battle to stabilize its economy. "To do that we have to go through the 'paradox of credit transparency'. That means our problems will be disclosed and foreign investors may not want to do business with us. But if we keep our existing system no one will be convinced of any changes."

So far, despite some encouraging signs - the recovery in the Korean won since the turn of the year, surges in the country's foreign reserves and a large current-account surplus - Korea is doing a poor job of convincing foreign investors that its system can change. Corporate debt is increasing and profits are falling, with little real sign yet of the restructuring needed for fundamental recovery.

Improvements in Korea's terms of trade this year are tipped to vanish as exporters slash margins to try to lift capacity utilization from an average of below 60%. The import slump, which has been the main cause for the superficial improvement in the external account, must reverse if exports are to have any chance of reviving. And the economy remains vulnerable to further external currency shocks. Unpaid wages are piling up - by May they amounted to W500 billion ($406 million).

Doubtful underpinnings

Some optimistic commercial bankers argue the estimated $10 billion held offshore by Koreans and proceeds from the planned sale of state stakes in companies including steelmaker Posco and Korea Telecom will underpin the dollar exchange rate at current levels of around W1,300. But most investment bankers expect a return to the W2,000 level by the year-end.

The sheer volume of Korea's corporate debt makes even rescheduling daunting. Stephen Marvin, head of research at Jardine Fleming, estimates disclosed domestic and overseas debt at $500 billion, and annual debt servicing at $70 billion. "The government, in collaboration with the IMF, has perpetuated the hoax that external borrowing is the biggest threat to the economy," he says. "If the government does not take quick, forceful action to liquidate many chaebol [conglomerates] and raise substantial funds offshore to recapitalize the banks, the country will slide into a deep depression next year."

Against this background, the FSC's Lee gets a surprisingly good press. "He is a big blessing for the country," says a usually acerbic Korean investment banker. "He is doing his job, which is sometimes very painful," says Milton Kim, president of SsangYong Securities. "When you shut down banks and disrupt the status quo you make a lot of enemies."

The FSC has taken some drastic action. In late June it closed five banks and issued compulsory winding-up notices to 55 companies. In July a further 50 were given notice to cease activities. But when it comes to dealing with the big-problem corporations, progress has been painfully slow.

A year or more after their collapse, Kia is still producing cars, Jinro is still brewing the national tipple, Soju, and even Hanbo, the first of Korea's big corporates to collapse, is still producing steel. Even more unusually for a bankrupt company, Kia's shares are still trading on the stock exchange.

Under an international auction conducted by Kia's lead bank, the Korea Development Bank, bidding for Kia was to have been completed by the end of last month.

Warburg Dillon Read branch manager Richard Samuelson is confident that Lee and other progressive market-oriented figures at the FSC control the agenda. But he worries that it is not being translated into policy. Bureaucratic resistance to change seems strong.

So-called emergency loans made by Korea's banks to effectively bankrupt corporations on the orders of the finance ministry provide a good example. After repeated claims that these loans would stop, they were revived in late April. There are also frequent exhortations by the government to conglomerates to restructure, but also to minimize lay-offs.

Deadlines for the elimination of cross-guarantees between chaebol members and reduction of total gearing to a maximum of 200% have been extended or fudged. Revised rules allowing asset revaluations are expected to ease compliance. When Korea's industrial companies draw up December year-end balance sheets Samuelson expects them to have added 70% to their equity in this way.

You must be joking

No new inter-group guarantees were allowed from April 1 this year. "But that was April Fool's day," quips Samuelson. Many companies will probably pay fines rather than dismantle guarantees. In late July the Fair Trade Commission slapped a W72 billion "surcharge" on 80 subsidiaries of the top-five chaebol for providing preferential financial aid to weak companies in their groups. Many healthy companies are still "sacrificing resources to support weak companies in the groups through inappropriate transactions", said FTC chairman Jeon Yun-churl.

Meanwhile bureaucrats charged with implementation are being purely reactive on improving accounting standards, believes Kim Il-Sup, vice-chairman of Samil Accounting Corporation, the Coopers & Lybrand affiliate in Korea, and a member of a special committee reporting to the FSC on accounting standards. "Korean officials are not expert in any field," says Kim. "But they don't want to delegate or listen to professional advisers." Accounting academics who have spent entire careers devising Korean generally accepted accountancy practices, are also loath to accept that the simplest way to restore international investor confidence may be to adopt US GAAP or IAS rules lock, stock and barrel.

The lack of transparency is scaring away foreign money. Even in friendly deals few buyers want to acquire companies, preferring to buy assets and thus avoid hidden nasties such as off-balance sheet liabilities, inter-group debt guarantees and completely undisclosed long-term supply deals signed up between chaebol members.

Also, sellers are often reluctant to do deals, especially at below book value. "Often CEOs don't want to strike deals because this will just speed up the bankruptcy of the group and accelerate their own demise," says Choi Hong, head of Daewoo Securities' M&A team. Buyers are also scared away by the prospect of dealing with Korea's often violent unions. Many acquirers demand that the outgoing management cut staff before handing over.