hankyoreh

The government says it is going to buy up around 6 trillion won worth of corporate-owned real estate not being used for business purposes. It will also move to buy up housing lots owned by construction companies. This is the first time it has done anything of this kind since immediately after the foreign currency crisis of 1997.

The plan is to buy the properties through the state-owned Korea Land Corporation to help manufacturing and construction companies suffering liquidity problems because of the financial crisis and economic stagnation. A lot of companies are at risk of going bankrupt, because of the recent KIKO (“knock-in, knock-out”) situation, among other things, and construction companies are increasingly facing financial difficulties at a time when there are more than 160,000 unsold apartment units. We agree that it is hard to ignore the dire circumstances being faced by manufacturing and construction companies.

However, purchasing non-commercial real estate is the wrong way to go about it and will promote a moral hazard. When companies purchased real estate that was neither urgent nor essential to their operations, they were first and foremost trying to make money on its eventual sale. The problem, then, is that the government is unloading assets for them that they bought as speculative investments. The government says it is going to buy the properties at 70 to 80 percent of the market rate and have companies use the money they receive from the sale to repay bank debt. However, there will also need to be a thorough follow-up and companies should be made to work themselves out of their predicaments. The real estate purchase should be limited to mid-sized companies that are in particular difficulty and must not include big business conglomerates that have a history of using their intelligence capabilities to make money off of speculative real estate investments.

It is similarly lacking balance to be buying from private construction companies the land they put together to build apartment units on. The government is also considering creating a fund for buying unsold apartment units and extending construction companies’ loans. It is a case of excessively preferential treatment for the government to buy properties from companies that bought them thinking they would be profitable, and then built housing units on, but which are now in hard times. If apartments are not selling, the thing to do would be to lower the price, but construction companies have been holding out and now the government is lending a hand. And it could cause banks to go insolvent, too, if insolvent construction companies have their loans’ maturity dates extended.

Ahead of this announcement, the government released a list of comprehensive financial measures that include US$100 billion in payment guarantees and US$30 billion in additional foreign currency liquidity. Banks need to be made to work their own way out of their problems and monitored with a thorough follow-up because, given the conditions of the financial market, we do need quick and decisive action; however, every time there is a crisis the country’s banks have taken government assistance, with some of them making nice margins in the process. The financial supervisory authorities need to recognize their responsibility in the poor oversight they have given in the past to make sure there is no further moral hazard here.

Please direct questions or comments to [englishhani@hani.co.kr]