Korean business failures rise

While the majority of failures would be of small and medium-sized firms, the country’s multi-national industrial conglomerates, known as Chaebols, were far from safe, said Choi Gong-pil, head of the institute’s research team.

“These days, we have a chaotic situation. Almost all the big groups are vulnerable," he said.

“They are in great danger. They have to find a way to survive in a new form, because they can’t survive the way they are now."

Top chaebols, whose grandiose expansion programmes funded by short-term borrowing are blamed for the country’s debt crisis, have pledged to restructure by shedding unprofitable units and concentrating on core business.

But they have come under fire from officials and economists for promising too little, too late. Businesses nationwide are being squeezed dry of operating funds by ultra-tight money supply conditions demanded as part of the country’s record-breaking $58 billion IMF bailout. Interest rates are running at up to 30 per cent.

"We are afraid that all the industrial base — all the so-called "good" industrial companies — may be in danger if the current credit crunch is not improved," Choi said.

Seven of the country’s top 30 conglomerates failed last year, including one of the top ten, Kia Group. YC Yoon, banking analyst at SBC Warburg in Seoul, said at least two more of the top ten were technically insolvent and likely to fail in the first or second quarter.

He said financial institutions, already struggling under portfolios peppered with bad debts, were extremely reluctant to lend due to pressure to meet Bank for International Settlements (BIS) capital-adequacy standards necessary if they are to operate effectively overseas. “The BIS requirement is intended to strengthen banks," said Choi. "The side effect is that it leads to a huge amount of bankruptcies and worsens the overall situation.This is a very vicious cycle and could lead to the total collapse of the economy."

Yoon said he expects non-performing loans at South KoreanFIs to more than double to 30 per cent of their total lending this year.

Business failures will also cause a dramatic increase in unemployment this year, a serious trauma in a country used to the concept of lifetime employment.

Analysts say serious reform of the financial sector is crucial to turning around the cycle of business failures, but would meet strong resistance from entrenched bureaucrats in the ministry of finance and economy (MOFE) and top bankers. “Consolidation in the banking sector means senior managers will probably lose their jobs," Yoon said. "That’s why bank presidents and the MOFE are strongly resisting restructuring." He said that if the government addressed the issue aggressively and closed down troubled banks, the risks of corporate bankruptcies should start to ease next year.