Loan Guarantees Nearly Triple for South Korean Conglomerates
Much of the South Korean market is controlled by a few large multinational firms, often referred to as “chaebol companies” or “conglomerates”. Some of the more well-known ones include Hyundai and Samsung. This type of business, often led by a single family, mostly arose around the time of President Park Chung Hee’s era of rapid industrialization in the 1960s through the 1980s and continues to play a large role in the country’s economy and politics to this day. According to South Korean officials, loan guarantees between these conglomerates have nearly tripled in the last year. The Fair Trade Commission (FTC) announced that the total value of the loan guarantees for the nations conglomerates came out to be 2.04 trillion won ($1.8 billion), a substantial rise from last year's 738.8 billion won.
Loan guarantees are deals in which one party agrees to pay off the debt of another if that borrower defaults. The large presence of loan guarantees among the chaebol companies has been a problem in recent years because these deals have created complicated cross-shareholding of subsidiaries among the conglomerates, protecting their ownership and control in the market. Large-scale loan guarantees have also been listed as one of the reasons for South Korea's vulnerability during the 1997-98 Asian financial crisis.
According to government officials, the spike in loan guarantees is largely attributable to the inclusion of another business group in the list of companies under watch. Although the total number of companies on the list decreased from 63 to 61, Jungheung Construction, with loan guarantees of 1.56 trillion won, was included for the first time this year.
Out of the 61 companies on the watch list, only ten had loan guarantee arrangements banned since April 1998. But of these ten, only three are obliged to completely eradicate their loan guarantee arrangements, while the other seven are allowed to maintain the arrangements for managerial and industrial restructuring purposes.
The rise in loan guarantees may seem problematic because it indicates an increase in the conglomerates’ control over the South Korean economy. Because of their market power, many small businesses have been suffering while the chaebols have been inching closer and closer to acquiring monopolistic characteristics.
However, it seems that the spike has mostly been caused by the inclusion of Jungheung Construction, and is not an indication of further dominance of the chaebols. The Fair Trade Commission states that if Jungheung’s loan guarantees are not counted,"the overall number stands at 485 billion won, or down 253.8 billion won, or 34 percentage points, from last year," ultimately coming to the conclusion that if they exclude “new entries that pushed up the numbers in 2011 and again this year, conglomerates have steadily resolved their loan guarantees among affiliates.” In fact, the new number does point toward a positive trend when compared to loan guarantees in the recent past. In 1998, at the peak of loan guarantee arrangements, the number stood at 63.5 trillion won, a 61.36 trillion won difference from today.