“THIS is an ethically perfect government,” South Korean President Lee Myung Bak reportedly told an unscheduled meeting of staff members late last month. The irony may not have been deliberate, but it would be difficult to interpret the statement otherwise.
In recent months, senior officials of President Lee’s government have become increasingly embroiled in one embarrassing corruption scandal after another.
Several of the graft cases plaguing Mr Lee’s administration concern the parlous state of many of the nation’s 105 savings banks. Because these banks account only for 2.4 per cent of the local financial sector, their demise will not have a serious economic impact.
Analysts say the commercial banks that dominate the banking system are unlikely to face the same problems as the savings banks, if only because they have more assets, face a tougher regulatory regime and have different financing arrangements. But with thousands of small depositors worried about the security of their deposits in the savings banks, the political implications for Mr Lee are potentially very serious.
President Lee’s remarks to his staff came not long after former top presidential press secretary Kim Du Woo was arrested on charges of taking bribes from a lobbyist for a troubled savings bank. The week before, a local businessman claimed that he had given huge bribes to former vice-culture minister Shin Jae Min and other senior officials.
All those involved have denied the allegations against them, but the pattern is depressingly familiar. Previous South Korean governments were reduced to lame duck status after being plagued by corruption cases in their final months in office. Mr Lee’s predecessor, Roh Moo Hyun, committed suicide in 2009 amid a continuing investigation into irregularities involving his relatives.
But perhaps the worst example is that of former president Kim Young Sam (1993 to 1998). The final year of Mr Kim’s presidency was a disaster. Several of his cronies as well as his son were jailed, and the National Assembly regularly sabotaged urgently- needed economic reform Bills.
Detractors cast President Lee in the same mould, arguing that he lacks the character to lead a country that has made great strides in ridding itself of much of the political and corporate corruption that characterised it in the 1990s. During the 2007 presidential campaign, Mr Lee was dogged by questions about his ethics. He was cleared of involvement in a stock market manipulation case only days before taking office in February 2008. Parliamentary and presidential elections are due next year.
South Korea’s savings banks were originally set up as mutual credit funds. They began to grow quickly about 10 years ago, providing finance for low-income earners and the self-employed. These banks offered high interest rates to attract deposits and took advantage of relaxed rules to expand further by approving risky loans and investments. They were especially active in providing bridging loans for construction projects, often before there were any real assets that could be used as collateral.
Since then, a falling real estate market and regulatory incompetence have combined with the connivance of irresponsible politicians to produce a crisis. So far this year, 16 savings banks have been forced by regulators to suspend operations. About 33,000 depositors have lost money, most of them pensioners or the working poor. Claims that wealthy clients were given notice in advance so they could withdraw their funds have intensified anger among depositors.
And the problem could get worse. An analysis of audit reports and regulatory filings by the Yonhap News Agency released earlier this month suggested that at least 33 savings banks were suffering from serious capital erosion.
The political impact seems particularly acute in the south-eastern port city of Busan, the traditional support base of the ruling Grand National Party. Kim Du Woo, one of President Lee’s closest confidants, has been accused of accepting bribes from the Busan Mutual Savings Bank in return for helping the bank avoid an audit by financial regulators last year. The scandal comes at a time when local residents are already upset over the scrapping of a plan to construct a new airport in the area.
Mr Lee visited the city late last month in an effort to shore up support. While meeting local leaders he pledged to develop Busan into the nation’s second economic centre, providing the city with whatever it needed before his term ends. This included resolving current water shortages and redeveloping the harbour.
But with Mr Lee’s political opponents salivating at the prospect of yet more graft scandals emerging in the coming weeks, the President cannot afford to rely on such promises. His decision to order a thorough probe into the banking scandal may help stave off political impotence, but only if investigators fail to turn up more examples of graft within his administration.
Copyright © 2011 Singapore Press Holdings Ltd