South Korea Teeters on the Edge

SEOUL, South Korea -- South Korea's largest credit card issuer, LG Card Co., said customers could withdraw cash again late Monday after creditors agreed to extend emergency loans and averted a liquidity crunch that threatened the country's financial system.

Debt-laden LG Card was forced to suspend cash advances over the weekend, raising the specter of a spiraling series of defaults as many South Koreans use their credit cards to pay bills and service other credit card debts.

LG Card has 14 million customers, almost a third of South Korea's population. They owe $22.7 billion and payments on about 10 percent of these debts are overdue.

"We will be able to resume cash advance services in the afternoon," said a spokesman for LG Card.

Woori Bank and other lenders agreed late Sunday to provide two trillion won ($1.68 billion) of fresh loans and to roll over LG's outstanding debt for one year, helping avert its insolvency.

But they warned they could write down LG family stakes in LG Card and sell other collateral if the LG Group parent failed to turn around the card firm. They also said a debt-to-equity swap and a sale of LG Card to strategic investors was possible.

LG Card had faced a default on its debts because its lenders and its parent LG Group disagreed over collateral the group had originally offered in return for the bailout.

LG Group chairman Koo Bon-moo risks losing management control of South Korea's second-largest conglomerate, or chaebol, since he has given his 5.46-percent stake in LG Corp. as collateral. The family behind the LG Group is unlikely to lose control, however, as they have more than 50 percent. Analysts said the loans had not resolved LG Card's problems.

"We think this liquidity support package may only be able to stabilize rather than resolve LG Card's liquidity situation," said Philippa Rogers, an analyst at Goldman Sachs. "We think LG Card needs to find a strategic investor."

"Despite the emergency financial aid, the company is at a very critical point," said Park Seok-hyun, an analyst at Kyobo Securities.

The credit card crisis has also raised fears of another hit to South Korea's economy. Data last week showed South Korea only emerged from recession in the third quarter.

Fallout from the crisis spread into the foreign exchange, stock and debt markets. The won fell 7.8 won to 1,203 to the dollar, and the wider stock market fell almost 2 percent.

Finance Minister Kim Jin-pyo said the government had intervened in the creditors' bailout of LG Card by asking bankers to make a "wise decision" as the crisis threatened a fragile economy, Yonhap news agency reported.

Hyundai Motor Co., South Korea's biggest automaker, said it delayed a $400 million bond offer after investors asked for lower prices to account for higher risks on Korean paper. Credit card firms have 25.8 trillion won of bonds maturing next year, 45 percent of which are from LG Card, local media say.

The card industry is struggling to cope with the aftermath of a credit boom that left card issuers with piles of bad debt.