Derivatives Corner Small Firms
By Jane Han
Staff Reporter
Considering the global economic slowdown, solid sales and an upbeat growth made Kim Tae-gyu's small-sized plastic container business pretty rewarding for his family and 20 employees. That is, until the Korean won started plunging to its weakest in years.
Suddenly, an unexpected and unfamiliar blow came from a financial product that he had subscribed to late last year.
``The situation looks all too different now,'' said Kim, who repeatedly sighed throughout the phone interview. ``I feel cornered and confused about what to do next.''
Many small business owners like Kim are left in trouble because they are exposed to a serious financial risk they hadn't experienced before. It's not from poor sales or high raw material costs, but from a derivatives product that has turned poisonous.
The currency option referred to as KIKO, or Knock-In Knock-Out, is a product aimed at safeguarding companies against currency risks. However, with the exchange rate soaring above expectation, many KIKO subscribers have suffered heavy losses, as they now must buy dollars at a higher value to repay their dollar-dominated debt to banks.
With the local currency losing more than 22 percent versus the dollar so far this year, dollar-squeezed companies linked to KIKO are falling deeper into debt.
The teetering firms are dealt a multiple blow as they find it nearly impossible to draw more bank loans, while their stock values are plunging to an all-time low over mounting volatility concerns.
Conditions grew worse Tuesday, as the failure of the U.S. bailout plan sent the Korean won reeling further against the greenback, raising worries that a bankruptcy domino-effect would sweep small and medium-sized businesses.
According to the Korea Federation of Small and Medium Business, SMEs make up more than 80 percent of KIKO subscribers, meaning they will be the biggest victims of the fallout. The Financial Supervisory Service's data backs this up, showing that 1.2 trillion won of a total of 1.6 trillion won worth of losses so far hit SMEs.
To cushion the damage, the Ministry of Knowledge Economy said Tuesday that it plans to provide special loans and debt guarantees to SMEs suffering from the liquidity crunch.
Five state-run financial firms including the Korea Development Bank and Industrial Bank of Korea will provide liquidity to SMEs to deal with the crunch, the ministry said in a statement.