By Christine Kim

SEOUL, May 12 (Reuters) – They are South Korea’s “too-big-to-fail” companies – the world’s largest shipbuilders which are each an enormous financial pressure and an essential nationwide image – and the federal government needs the central financial institution to fund an unconventional rescue of the sector.

The three greatest shipbuilders – Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries Co Ltd and Samsung Heavy Industries Co Ltd – sustained report losses final yr, dragged down by the worldwide commodities plunge and falling commerce volumes.

The authorities needs the central financial institution to print cash to purchase bonds in two state banks propping up shipyards in addition to shippers – a measure some officers name quantitative easing.

Publicly, the Bank of Korea (BOK) says it’s keen to cooperate.

“If (the BOK’s) power to print money can be mobilised, there should be understandable reasons and the central bank’s monetary loss should be minimised. That’s our basic principle,” BOK Governor Lee Ju-yeol mentioned earlier this month, based on Yonhap information company.

But some central financial institution insiders have issues concerning the precedent such a transfer would set in the best way financial coverage is used.

“Our basic stance is that government money should be the entirety of the capital injected into the banks, but we are open to all discussions and cooperation,” a senior Bank of Korea official immediately concerned within the matter instructed Reuters.

If the BOK is compelled to inject capital into the 2 state banks – Korea Development Bank (KDB) and the Export-Import Bank of Korea (KEXIM) – it will ideally be accompanied by authorities financing, the official mentioned.

As of final yr, the 2 banks had mixed publicity of 55 trillion gained ($47 billion) in publicity to shipbuilders and shippers together with Hanjin Shipping Co Ltd, Korea’s largest delivery line.

Under the plan supported by President Park Geun-hye, funds supplied by BOK can be used to move off a credit score crunch ought to KDB and KEXIM be left holding the bag if shipbuilders or delivery traces default.

Despite a wholesome debt-to-GDP ratio of simply 40 p.c, the federal government is reluctant to help the sector itself by promoting extra bonds – which might run counter to new Finance Minister Yoo Il-ho’s efforts to enhance the nation’s stability sheet – and has set a June 30 deadline to provide you with a plan.

Shipbuilding accounts for round 200,000 jobs and was among the many industries championed by the present president’s father, Park Chung-hee, who dominated South Korea from 1961 till his assassination in 1979.

A logo of the nation’s industrial would possibly, it performs a significant function in Korean political life and a collapse of the sector can be catastrophic.

Daewoo Shipbuilding is already almost half-owned by KDB following a bailout within the aftermath of the Asian monetary disaster of the late Nineties.

RESTRUCTURE OR BAILOUT?

While the federal government has packaged the proposed measures as a type of quantitative easing, others see it as merely backing a state bailout.

The BOK’s workers union argues it will erode independence, and factors to a 1989 transfer that ordered the central financial institution to print cash to help the inventory market, which failed.

Union chairman Kim Young-gean mentioned printing cash to not directly assist the shipbuilders and shippers might result in calls for to assist different struggling industries, equivalent to metal and chemical compounds.

“Every time something like this happens the BOK will be asked, ‘Why aren’t you helping this time?’ …. In the end, we’ll just have faulty bonds on our hands and the responsibility for that will be dumped on us,” he instructed Reuters.

The central financial institution by legislation operates independently of the federal government however is extensively perceived by buyers and analysts as topic to authorities stress.

Printing cash to purchase bonds within the two coverage banks wants parliament to agree to vary the constitution on the BOK or the KDB – no simple feat in a legislature the place Park’s get together will now not maintain a majority as of May 30.

Another chance is for BOK to immediately present KEXIM with money, which might not want parliamentary approval because the central financial institution owns 13.1 p.c of the financial institution’s capital.

Or it might purchase contingent convertible bonds from KDB, debt that additionally carries the loss-absorbing traits of fairness.

“I think the government and central bank know what they have to do in keeping the sectors afloat,” mentioned Yoo Shin-ik, chief economist at Shinhan Bank’s monetary analysis centre.

“But there are differences in the urgency that each of them feel.” (Additional reporting by Tony Munroe; Editing by John Mair and Sam Holmes)

(c) Copyright Thomson Reuters 2016.