Koreas Experiences with Insolvency Lessons for Other Countries

Korea’s Experiences with Insolvency: Lessons for Other Countries Stijn Claessens University of Amsterdam Forum for Asian Insolvency Reform, Seoul, November 10 -11 2003

Korea’s experience with insolvency · · · Korea did well in restructuring, better perhaps than expected Insolvency threat mattered for SMEs, less so for large firms and not much for many chaebols Out of court procedures useful as a complement to formal insolvency, but still needed formal threat Needed to go through more than one round, to “learn” and overcome political economy But costs increased and assets ended up in similar hands

Hard to generalize on insolvency • No single approach, varies with stakeholders (creditors, equity, labor, suppliers), social values • Institutional context of country greatly matters – Contract, secured, securities, criminal laws; Extra-judicial options; Creditors, banks, government, SMEs; Diversity of claims, informational asymmetries, quality of information; Financial and labor markets; Ease of entry/exit; “Stigma” of bankruptcy • Korea confirms importance of judicial system, laws alone not sufficient. Korea did both well

Lessons for other countries Loss containment, consistency, political economy • Too big, too politically sensitive or too large to fail or to ignore: design a conscious holding strategy: don’t let the losses pile up • Strategy is not just about insolvency, also hardbudget constraints, social safety net, etc. • Restructuring needs to get assets in ‘right” hands. Can “target” owners which support future reforms. In the meantime, government perhaps needs to hold assets, but do not attempt to restructure