Monday, November 24, 2003
LG Card crisis: Pitfall or economic prowess?
Reuters Seoul, November 24
Is the LG Card cash crunch merely a taste of what's to come for South Korea or an example of the government's ability to contain a crisis?
As markets get to grips with the implications of this weekend's emergency measures to support the cash-strapped credit card issuer, economists on Monday were divided over whether there was cause for alarm.
Some said South Korean policymakers had proven themselves adroit at solving crises like these. Others said there were big uncertainties and potential for lots more mayhem.
What's clear to many, though, is that this latest setback has come at a delicate time for the slowly recovering South Korean economy and that averting deeper problems will not be easy.
"What worries investors more is the credit card liquidity problems are not matters that can be easily settled with immediate emergency measures," said Hwang Joong-kwon, an analyst at Hyundai Securities. "It has more to do with structural problems in the industry."
LG Card Co, South Korea's biggest credit card issuer, had to suspend cash advances to customers over the weekend, prompting an emergency meeting of creditors.
After what later was revealed to be government intervention, creditors agreed to provide 2 trillion won ($1.68 billion) in emergency loans. LG was able to resume cash advances on Monday.
But for markets, damage had already been done. The stock market on Monday fell more than two per cent and the won currency declined close to one per cent.
"The situation is especially serious because it is a credit card company instead of a manufacturing company, for example," said Oh Suk-tae, an economist at Citibank.
"Cash demand will sharply increase toward the end of the month and we don't know what will happen if many people try to withdraw cash at the same time."
CONSUMER-LED WORRIES
Markets have been worried for a few weeks about troubles among credit card issuers, with share prices of many of these firms tumbling recently. But for anyone who had grown optimistic about the economic outlook, this latest crisis has served as a painful reminder of underlying weakness.
Only last week data was released showing South Korea's economy had climbed out of recession in the third quarter after a downturn earlier this year.
South Korea says it will not be sure of an economic recovery until domestic consumption, which accounts for about half of the country's annual gross domestic product, shows a sustained pace of growth.
The economic stakes may be high, but some believe South Korea will know how to handle this.
"The government of Korea has a lot of experience in these kinds of liquidity problems and I think this kind of damage we are now seeing will be temporary," said Tim Condon, economist at ING Financial Markets in Hong Kong.
"The government of Korea will not let it get out of hand and threaten the financial system generally, but it is obviously a short-term source of some selling pressure," he said.
Economists cited South Korea's handling of a $1.2 billion accounting scandal at SK Global, a trading company, in March as evidence of its crisis-fighting abilities.
© Hindustan Times Ltd. 2003.