Abstract

Of the countries affected by the East Asia financial crisis of 1997, Korea offers perhaps the most lessons on corporate restructuring in a systemic crisis. One reason is the magnitude of the restructuring challenge faced by over-extended and over-indebted chaebol. Another reason is Korea’s record on corporate restructuring. On the one hand, Korea can point to major accomplishments in addressing moral hazard, implementing some operational restructuring, and reducing corporate leverage. On the other hand, legitimate concerns remain about ongoing weakness in the corporate sector. Proceeding from a framework for assessing corporate restructuring in a systemic crisis, the paper highlights a recurring pattern in corporate restructuring activity in Korea since 1997: periodic decisive action by creditors to take over companies; followed by financial stabilization through court supervised insolvency or out-of-court workout; followed by reluctance to pursue more fundamental operational restructuring; and with episodic government initiatives to promote long-term corporate reform and re-energize the corporate restructuring process. From this analysis, the paper identifies lessons more broadly applicable to other countries in systemic crisis and highlights Korea-specific issues and recommendations.