By Yoon Ja-young
Staff Reporter
Regulators are moving to adopt relief measures as many small-and medium-sized firms are in jeopardy due to their purchase of a bizarre derivative product transferring currency exposure risk to corporate borrowers from banks.
The innovative product known as Knock-In-Knock-Out (KIKO) was quite attractive to corporate borrowers when the currency rate was stable and predictable as it is a kind of currency option that allow businesses to sell dollars at a fixed won-dollar rate if the exchange rate stays within the range set in the contract. The product was popular among small-and medium-sized exporters as they could hedge against a plunge of the won-dollar rate at a relatively cheap price.
But trouble began when the won-dollar rate soared beyond the ``unimagined territory'' this year, forcing KIKO subscribers to buy dollars expensively to repay their dollar-denominated debt to banks.
The loss is estimated to be around 1-5 trillion won. Corporate managers complained that banks did not fully alert them about the risk. Many firms plan a lawsuit against the banks. According to the Korea Federation of Small and Medium Businesses, the loss sustained by 132 firms preparing lawsuits totaled 322.8 billion won. The loss grew bigger as the won-dollar rate soared further recently. The loss is now estimated to be nearly 1 trillion won. Banks are under fire for transferring the currency exposure risk to small-scale exporters who do not know the nuts and bolts of currency risk.
For the first time, Financial Services Commission (FSC) Chairman Jun Kwang-woo acknowledged Monday that an increasing number of small firms could suffer cash flow problems as the economy slows down. ``Support on their liquidity should be considered if losses from KIKO get serious,'' the chairman said.
Kwon Hyouk-se, the FSC standing commissioner, also said Monday that the commission would consult with other ministries to set up measures for KIKO victims. He was positive about government support, saying there were precedents. For instance, the government supported the liquidity of promising venture businesses after the Asian financial crisis through Korea Technology Credit Guarantee Fund and Korea Credit Guarantee Fund.
The regulator and Cheong Wa Dae, however, aren't making one voice regarding the solution for KIKO. Bahk Byong-won, senior presidential secretary for economic affairs, said Friday that the KIKO problem should be solved between the subscriber firm and the bank. ``Since it is a deal between a business and bank, it's not where the government should intervene,'' Bahk said. He added that KIKO is an investment product, which would have returned firms huge profits if the won-dollar rate had moved in the other direction.
Opposition parties criticized the government and Cheong Wa Dae. Rep. Song Young-gil of the main opposition Democratic Party said the government neglected KIKO while the Democratic Party set up a commission to cope with the trouble. ``KIKO is an unfair transaction,'' the lawmaker said. He estimated the loss to near 5 trillion won if the won-dollar rate soars above 1,153 won.
The minor conservative opposition Liberty Forward Party said the government, which has repeated that it would be a ``business friendly government,'' is sitting idle with arms folded while many small and medium-sized businesses are going bankrupt due to KIKO.