More than one out of 10 large Korean companies are not earning enough to afford interest obligation on their debts, and the weakness is not limited to the shipbuilding and shipping sectors that are under focus for restructuring. A survey by the Maeil Business Newspaper showed that of the country’s 380 top non-financial companies in terms of revenue, 43 reported times interest earned ratio - the coverage percentage of annual interest expenses by net operating income - of less than 1 for two consecutive years. A ratio of 1 means that a company has hard time paying interest on its borrowings solely from its earnings. The government has been requiring credit scrutiny on large companies with an interest coverage ratio of less than 1 for two straight years since the second half of last year. A company receiving poor appraisal from creditors is headed for debt workout arrangement or court receivership.

Moreover, the financial ailment has spilled over from the well-known patients - shipbuilders, shippers, steelmakers, petrochemical companies and constructors - and has been spreading fast across the board. Weak players are sprouting from the machinery, defense, aviation, automobile and food sectors. The phenomenon is likely to worsen and continue for a lengthy period, given little sign of relief on the external front. Exporters are hard hit by fast slowdown of the Chinese economy and fallout from global overcapacity due to a prolonged slump in demand. The local economy is hardly likely to pick up speed from the current pace of 2-percent range on new growth engines in the near future while global demand remains subdued. It is therefore imperative to accelerate the restructuring drive to make the economy leaner and run without the burden of troubled members.

We may be underestimating our economy. It has the resilience to sustain spillovers from sporadic insolvencies. Although possibly messy and painful in the initial stage, the removal of bottleneck can help revive the benign flow in the economy. Risk aversion can make one soft and miss out on opportunities, and excessive fear of pain and repercussions can even prove to be deadly as it can worsen a patient’s state beyond a cure if fundamental actions are not taken in time. Corporate distress tips over to the financial sector, and financial troubles can devastate the economy. The Korean economy could pay as much as it had after the Asian currency crisis in 1997.

Restructuring mechanism must become institutionalized for the Korean economy. Funding is essential to regularize corporate restructuring. Although the purpose had been different, we may have to study the emergency and radical options like the expansive bond-purchase program by the U.S Federal Reserve opted to safely guard the economy against another major depression following the 2008 Wall Street meltdown. As the U.S. case suggests, securing long-term and sufficient funding is essential to bring out satisfactory and lasting results in macroeconomic actions.

There is no time for the government and the Bank of Korea wage a war of nerves over jurisdiction. Against a common battle to preempt an economic crisis, the government and the central bank must be on the same team. Whether the government issues debt or the central bank prints out money to support state banks’ funding for corporate restructuring, it would be the people picking up the bill at the end of the day. Instead of idly wrangling to protect their own interests, the two should muster their wisdom to come up with a way to lessen the burden on the people while producing effective results from restructuring. Their common resolve and clear strategy would help persuade the people. We have little time to lose.

By Jung Hyuk-hoon

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]