US questions Hyundai bailout

Despite its troubles, Hyundai Electronics still goes for the hard sell on its website

The new US trade representative has said that the South Korean government's financial support of debt-saddled conglomerate Hyundai violates World Trade Organisation (WTO) regulations.

Robert Zoellick, speaking at his Senate confirmation hearings, added that the Hyundai rescue is "part of a deeper problem in Korea, which is slipping from the restructuring that the government promised to do".

The remarks appear be part of a new tough line on trade emerging from the Bush administration, which is determined to build up its own free trade zone in the Americas.

Mr Zoellick was referring to a recent move by the state-run Korean Development Bank (KDB) to bail out Hyundai Electronics Industries (HEI), the world's biggest maker of memory chips, and allow it to roll over its debts.

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HEI expects the state-run bank to repurchase a total of 2,900bn won ($2.3bn) in corporate bonds it has issued due to mature this year.

But the US is questioning whether this is legal, saying that if the South Korean government fails to call in its debt, then it is essentially subsidising the company.

Hyundai, which has built up huge debts, was close to bankruptcy before securing a new lifeline from creditors last month.

Pressing for action

HEI's largest US rival in the memory chip business, Micron Technologies, has been urging the US government to take action against HEI if the financial bail-out goes ahead.

Striking workers at Hyundai

But the South Korean government has defended its action, saying it is offering the lifeline to prevent the companies falling into bankruptcy.

So the issue looks like coming to head, with a trade row between the two countries looming.

But the accusation that the South Korean government is breaking WTO regulations has been called into question by some experts.

This is because the government did impose conditions on HEI - insisting that it implement tough restructuring measures in return for the state assistance.

The US argues that the South Korean government is coercing banks to offer financing without getting the restructuring.

Reforming the chaebol

South Korea's economy is dominated by a handful of conglomerates - or chaebol - whose interests range from shipbuilding to engineering to economics.

The mismanagement of these companies which had accumulated huge debts, was seen as one of the factors that led to the Korean financial crisis.

The reform of the chaebol was a key condition in securing a huge IMF loan for the government in 1998, bailing out the economy.

But recently, as layoffs and strike threats have mounted, the government appears to be backing off from forcing through further reforms.

In the latest crisis, several of Hyundai's group companies have faced bankruptcy, before receiving help from state-run banks like the KDB who have spent nearly $20bn rolling over loans which are coming to maturity.

The four main chaebol are Samsung, Daewoo, Hyundai and Lucky Goldstar.