Bad debt

By Na Jeong-ju

Politics editor

Debt is a necessary part of life. An optimum level of debt helps boost wealth and creates a virtuous circle in a household economy. However, bad debt can ruin one’s life.

This is the same for a country. The recent debt crisis in Greece should be an alarm bell for Korea Inc., where the debt burden is growing heavier on public and private sectors.

Specifically, indebted state enterprises are emerging as a key downside risk for the economy. The government says its debt level is still lower than other developed countries, but debt held by public firms has been soaring at an alarming rate, adding to concerns about the rapid growth in household debt.

For several years, the government has faced frequent calls to restructure debt before it is too late and introduce drastic measures to help the country stand on its own two feet.

However, there have been only empty promises by policymakers and the situation is only going from bad to worse. The Park Geun-hye administration pledged to tackle “parachute appointments” for managers of public firms, but their CEOs are still mostly former politicians and bureaucrats who lack management skills.

A recent government report suggests the problem has reached a point of threatening the country’s fiscal health.

The debt held by public firms more than doubled to 560 trillion won as of last year, compared with the end of March 2008. While the firms’ debts were rising, their assets decreased, thus their debt ratio jumped from 174.7 percent to over 200 percent during that period.

This is mainly because the government has passed the burden of budget deficits to state firms while carrying out massive public engineering programs, such as the four-river project.

As a result, eight major public firms account for over 90 percent of total debt. They are Korea Land and Housing (LH), Korea Electric Power Corp. (KEPCO), Korea Gas Corp., Korea Expressway, Korea Hydro and Nuclear Power Corp., Korea National Oil Corp., Korea Railroad (Korail), and Korea Water Resources Corp. (K-water).

What is alarming is that their debt not only aggravates their bottom lines, but also places strict restraints on the next government’s fiscal policy and eventually will lead to a heavier burden on taxpayers.

The Park administration previously placed the restructuring of state firms as one of its top policy goals. It vowed to reduce their debt by selling assets, cutting benefits for employees and shutting down unprofitable businesses.

It submitted a bill including these reform measures to the National Assembly, but debates on the bill have been delayed due mainly to protests from opposition lawmakers.

The country’s two umbrella unions ― the Korean Confederation of Trade Unions and the Federation of Korean Trade Unions ― have opposed the government-proposed measures. The unions at concerned public firms have also vowed strikes and street demonstrations unless parties reflect their demands in enacting the law.

The opponents claim many public firms are now under mounting debts because they were “compelled” by the government in the past to participate in unprofitable state projects, but it is now passing the responsibility to the firms.

Their arguments are plausible ― and understandable. Surely, the government’s lax monitoring and mismanagement made them what they are today.

However, the problem is becoming more serious. If we do not take action now to address the debt held by the public sector, there will be huge consequences, as seen in Greece.

Already, many public firms are in dire straits and unable to survive without taxpayers’ money.

As a bad debt ruins a person’s life, a bad debt puts a country at risk. And the burden will be greater for future generations.