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Tuesday, 19 December, 2000, 15:19 GMT
Collapse of the Korean chaebol
By BBC News Online's Orla Ryan
Life was once easy for South Korea's chaebol - some of the biggest companies in the world outside of the major industrial nations.
Hailed as the engine of its booming economy, their leaders were feted, their businesses infiltrating almost every aspect of South Korea's economic life.
Three years after the International Monetary Fund (IMF) bailed out South Korea, the chaebol's management now face angry workers at home and disgruntled investors abroad.
Up until now the chaebol have been sheltered by the government's reluctance to force through reform, but this protection may be disappearing.
The four main chaebol are Samsung, Hyundai, Daewoo and Lucky Goldstar.
Their growth in the 1950s and 1960s was fostered by the government, who saw them as the engine that could propel the country's growth.
The family-run businesses had wide-ranging interests, which covered everything from shipbuilding to electronics.
Three years ago, following the devaluation of the Korean currency - the won - the IMF bailed out South Korea with an aid package worth almost $60bn.
The money was given under strict conditions that South Korea reformed its economy and the chaebol.
The chaebol were weighed down by debt, which they had run up during a hasty expansion programme in the 1990s. When Asia's financial crisis struck, many found it difficult to generate enough cash to pay its creditors.
And by lending money from one part of their far-flung operations to another, they were able for a long time to conceal the extent of their debts.
Good times return?
The arrival of the IMF led to promises of reform from the chaebol and, superficially, South Korea appeared to be one of the countries that recovered fastest from the Asian crisis.
Last year appeared to be a good year for the economy. Unemployment fell, growth rose by 11% and inflation remained under control.
But, some analysts argue, last year's recovery was deceptive, hiding the fact that no real reform took place and giving the chaebol an excuse to shirk calls for reform.
Their argument is that unless real reform does take place, the recovery will be shortlived.
And that will only take place when profit, rather than growth for its own sake, becomes the guiding principle of Korean industry.
There have been some signs of change.
Samsung sold a controlling stake in Samsung Motors to Renault, representing the first time a foreign company has taken control of a Korean automaker.
The top four chaebol reduced their debt to equity ratio from 352% to 174%, an impressive reduction, but still seen by analysts as worrisome as failure to pay could create serious problems for the country's banks and investment trusts.
The combined liabilities of the top four chaebol account for over 25% of total business sector debt in Korea.
This reduction can be seen as being misleading, argues credit rating agency Standard & Poor's as it owes as much to an increase in capital as a reduction in debt.
"There remains a danger that the chaebol may attempt to grow themselves out of their troubles," Graeme Knowd, associate in Financial Institutions Ratings at Standard and Poor's in Tokyo said.
"But if rapid economic growth ends up raising interest rates, the chaebol's debt repayment plans will be hurt."
Three years on, the IMF is also clear that more needs to be done.
"On the corporate restructuring front, creditor-led workout programs need to move beyond financial stabilisation and complete strategic sales, spin-offs and other operational restructuring. The top 4 chaebol remain highly leveraged and their continued restructuring will need to be driven by creditors and markets," Stanley Fischer, IMF managing director said.
Some of the reforms announced announced have since been tarnished by scandal.
The Financial Supervisory Commission was created in 1998 as watchdog to help Korea reform its economy. It has since been implicated in bribery scandals, throwing a question mark over its efficacy as a watchdog.
Some of the chaebol have teetered on the brink of collapse.
Daewoo Group finally bowed to pressure from creditors and agreed a rescue deal under which it will effectively dismantle itself in August last year.
Its subsidiary Daewoo Motor, was recently declared bankrupt.
Ford was once seen as a buyer but walked away once it saw the state of the company's books. But now the creditors have agreed a restructuring plan, the urgency to sell the car company appears to have faded.
Similarly Hyundai Engineering was on the brink of collapse, only to be bailed out by its profitable sister company, Hyundai Motors, despite a dispute between two sons of the founder over who would inherit his empire.
Price to pay
But the government's reluctance to push through change is also easy to understand.
Some estimates are that 200,000 jobs or more might be axed if the chaebol are forced to close down their loss-making businesses.
Fear of job losses at Hyundai and Daewoo led to rioting on the streets of Seoul this year.
There is a limited social security net, though the government has attempted to widen it.
The government's fear is that ultimately the companies are just too big to allow to fail and that the repercussions of allowing Hyundai - which can't pay its debts - and Daewoo Motor to fail will be huge social unrest.
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