Hence, benign inflation in fact reflects worrying developments beneath the surface. The ITCs' heavy exposure to the chaebols and the local asset markets has aggravated this liquidity crunch. Such redemption has forced the ITCs to sell assets and bonds and to stop purchasing or rolling-over corporate paper. This has led to a concern that the ITC woes could feed a downward spiral of falling asset prices and a worsening of the credit crunch. Such a vicious cycle, if left unattended, could eventually raise the level of nonperforming loans and cripple the economy.
Banks remain vulnerable despite recent restructuring efforts.
The Financial Supervisory Service recently asked banks to raise their provisions by another 3.3 trillion won because of losses from the Daewoo Group and loans made to firms under debt-restructuring and court protection. It is doubtful if the additional provisions would be sufficient, because many nonperforming loans under the FSS's classification should have been deemed bad loans, and many loans to companies under debt-restructuring programmes have little chance of being recovered. Since late 1997, the government has spent about 102 trillion won in bank bailouts. Meanwhile, the broad-money stock stands at 466 trillion won. Seoul's plan to spend another 30 trillion won in the coming year in bank write-offs suggests that the de facto money supply would be reduced further, dragging on future GDP growth.