The information available amply demonstrates that the banks did not act independently but were entrusted or directed by the GOK within the meaning of Article 1.1(a)(1)(iv) of the ASCM. In particular:

　

First step: the financial sector was assisted with public funds.

The financial crisis of 1997 resulted in a foreign currency crisis and subsequently forced Korea to seek financial aid from the IMF. It gave rise to insolvent financial institutions and raised the spectre of large scale restructuring of the financial sector. The financial crisis was, however, to a large extent due to the crisis in the corporate sector. The IMF notes: "In particular, in the period 1994-96, Korean conglomerates undertook an aggressive investment drive financed by large increases in borrowing from domestic banks, which, in turn, sharply increased short-term external borrowing, During 1997, an unprecedented number of highly leveraged conglomerates went into bankruptcy as the build-up in capacity proved not viable owing to the depreciation of the yen, a sharply adverse movement in Korea's terms of trade, and the slowing of domestic demand in 1996.The bankruptcies resulted in a severe deterioration in the balance sheets of Korean financial institutions."²⁷ (emphasis added)

In these circumstances given the large financial resources needed to facilitate corporate restructuring and the weak state of the banking system the GOK first opted to deal with the problem of the liquidity/survival of the financial institutions. The GOK did this by forcing the restructuring of the financial institutions (through generous capital injections to viable ones and through forcing the liquidation or merger of non viable ones). Thus, for example, from January 1998 to September 2000, 5 commercial banks were closed and 11 banks were merged to form 5 banks. GOK accompanied the financial sector restructuring with a generous aid package including the provision of public funds. In 1998 GOK set aside W64 trillion in public funds for the financial sector restructuring. The plan provided that the Government and KDIC funds would be used to inject capital directly to the banks and that KAMCO would alleviate their debt burden through the purchase of impaired assets (non- performing loans) . Thus, the government used the entire amount for purchasing NPLs and for re-capitalising financial institutions. In 2000 GOK set aside another W40 trillion for the so-called phase-two of the financial sector restructuring i.e. in order to deal with further liquidity problems of banks due to the introduction of tougher loan classification criteria (forward looking criteria) and to shield them further in case their BIS capital adequacy falls below the minimum required level.

　

However, dealing with the financial sector crisis would not be enough to deal with the financial crisis, if no measures were taken to restructure the corporate sector. As IMF confirmed early in 2001²⁸: "Significant steps have been taken to strengthen the financial system, and the problems that remain largely stem from continuing weaknesses in the corporate sector. Progress has been most notable in consolidating and recapitalizing the banking system, operational restructuring, and strengthening prudential regulations and supervisory oversight. The restructuring has been aided by a large injection of public funds."

　

Under its commitments to IMF, the GOK engaged into a vast corporate and financial restructuring exercise. Changes in the corporate and financial laws were effected along with the corporate restructuring as part of the same package of measures with a view to meeting Korea's IMF obligations. GOK took concrete measures to strengthen the legal and institutional framework to facilitate corporate restructuring. The solution favoured by GOK was the so-called "London Approach". The IMF policy Matrix communicated by GOK in 1998 already provided for the banks to proceed to voluntary workouts with the distressed but viable corporate clients. Indeed, almost all the corporate restructuring measures agreed by GOK with the World Bank encouraged financial institutions to first examine the possibility of dealing with the problem through voluntary corporate workouts. All the measures taken by GOK in that respect aimed at facilitating debt restructuring in the form of workout programmes (e.g. reviewing legislation to eliminate tax disincentives or regulatory impediments to the conversion of debt into equity for chaebol affiliates or proposing tax measures to encourage corporate mergers and acquisitions and asset sales). In that respect GOK had already predetermined the split of companies into first-tier chaebols (the top 5), the second-tier chaebols (the next 64) and the rest suggesting the appropriate restructuring solutions for the first two groups. Furthermore, GOK embarked into a massive legislative effort at a very early stage in 1998 so as to prepare the ground for the future workouts; thus, all relevant laws were enacted and/or amended (e.g. amendments to the bankruptcy act, the company reorganisation act, the composition act) early in 1998.

　

Thus, workout programmes only began once the GOK had established the necessary framework allowing the restructuring to take place. Thus, the GOK clearly created a new legal environment with a view to directing financial institutions to favour debt restructuring over other alternative solutions (e.g. bankruptcy) to deal with the exceptional circumstances facing the county.

　

As explained above, the whole package of measures including the framework for the voluntary restructuring was orchstrated by GOK in an exceptional effort to meet the IMF terms for the loan and in order to put an end to the financial crisis. The injection of capital into creditor banks was in general a powerful incentive for these banks to participate to the GOK corporate restructuring programme. Furthermore, such decisions were facilitated in cases where the GOK obtained a majority shareholding in these banks (practically nationalising certain banks such as the Hanvit, Seoul, KFB, Cho Hung banks). As a result of the financial sector restructuring GOK became a major player in the banking sector owning a significant amount of banking assets. The IMF noted²⁹: that in early 2001 "The government owns 65 percent of the assets of the banking sector (made up of a majority stake in three major banks and minority stakes in two more) as well as four nonbank financial institutions". It is difficult to think of a situation where the GOK would have provided a capital injection to a bank, obtain a majority or substantial minority shareholding and then that bank deciding to abstain from the GOK corporate restructuring framework. Financial Institutions had no reason to abstain from the corporate restructuring programme given that their liquidity directly depended on GOK. Furthermore, in many instances the purchase by KAMCO of bad debts have led to KAMCO becoming the creditor (replacing the commercial bank) therefore allowing GOK to better control participation in corporate restructuring measures (especially those proposed by state-owned lead banks (e.g. the KDB in DHI's case).

　

In an effort to convince banks to participate in the corporate restructuring process GOK passed a very strong message by explicitly limiting the provision of assistance to banks which would be certified by FSC as "performing their role" in the process. In particular, GOK clearly stated that: "In order to enhance the incentives for banks to participate fully in the corporate restructuring process, no public funds, whether by way of KAMCO (NPA Fund) purchases or capital injections or other means, shall be made available to banks which are not certified by the FSC to be performing their role in the corporate sector restructuring process."

　

The above statement first appeared very early in the restructuring process i.e. in GOK's 27 October 1998 Letter of intent to the IMF. It was then repeated in the following two years in all subsequent letters up until the last one (of 12 July 2000). Even though FSC denied during discussions any "certificates" as such were issued, the intention of GOK to use its powerful financial means to oblige banks participate in the corporate restructuring is clearly spelled out.

　

Finally, even IMF has expressed worries on the direction of banks by GOK and have made an explicit statement to that effect³⁰: "Directors also urged the authorities to refrain from pushing creditors into bailing out troubled companies, and to maintain an open attitude to foreign involvement (including purchases of assets) in the restructuring process. Over the longer term, stronger corporate governance practices will be crucial to allow markets to drive the process of corporate restructuring." (emphasis added) and further down: "In this regard, they noted that Korea is a mature economy and that it will now be important for the government to step back from intervening in the operation of markets and economic decision making, and instead rely in the future on markets in imposing discipline". (emphasis added)

　

Financial institutions are expected to incur substantial losses during any debt restructuring dial. If such losses risk weakening their balance sheets, the GOK undertakes to provide further assistance. Indeed the pledge of GOK to assist financial institutions is an open-ended one. In its letter of intent to IMF dated 15 July 2000, GOK clearly stated it aimed to continue to support financial institutions facing liquidity problems; the financial institutions were at the same time strongly encouraged to continue getting involved in the corporate restructuring process (which obviously entails further losses). As a matter of fact as stated above, financial institutions not willing to participate in the process would not obtain public funds.

In fact the IMF has warned³¹ that: "In the case of the 6-64 chaebol ranked by asset size, debts are being restructured under a creditor-led debt workout framework but early evidence suggests that restructuring has not gone deep enough and several of the agreed workouts will need to be revisited to reduce debt to a more sustainable level." And added: "the process of building a sound banking system is far from over. They welcomed the introduction of stricter loan classification guidelines and strengthened supervisory oversight, but observed that the ongoing process of corporate restructuring was likely to expose additional losses and require greater efforts to strength en banks' capital".

　

Furthermore, with regard to problem banks, the FSC has adopted a trigger system of prompt corrective action since April 1998. When the BIS capital ratio or the overall evaluation result of a banks falls below minimum criteria, the FSC should take prompt and appropriate action to correct the problem including, if necessary, further capital injections by the GOK or KDIC³². On the basis of this scheme six further banks were re-capitalised by GOK in as late as November 2000. GOK stated in discussions that the re-capitalisation was necessary as these banks had been particularly affected by the Daewoo crisis.

This demonstrates that financial institutions could and can still afford to enter "onerous" debt restructuring deals knowing that in case of liquidity problems GOK can ultimately intervene.

　

GOK historically played an important industrial policy role. This has not been totally abandoned, though. Following the 1997 crisis the GOK took an active role from the very beginning in corporate restructuring by participating in the agreement with the five big chaebol (including Daewoo) in the establishment of the CSIPs³³; for example, the GOK undertook in that agreement to strengthen co-operation with the corporate sector and the financial institutions in order to successfully implement the agreed terms without impediments.

　

Furthermore, the GOK recommended that seven key industry sectors be restructured through asset sales and swaps between the five top chaebol to deal with a problem of over-capacity (the "big deals" project)³⁴. Furthermore, the GOK undertook to actively follow those deals and report to the World Bank.³⁵

　

Other instances evidencing the still very active role of GOK in corporate restructuring involve the assignment early in 2001 to KDB a lead role in the purchase of corporate bonds. With regard to the bond scheme IMF stated: "Commenting on the increased use of collateralized bond obligations and the establishment of bond market funds, Directors noted that some government intervention may have been justified, given the bunching of maturities and the current weak demand for bonds. Nevertheless, Directors cautioned the authorities to ensure that these measures are transitory, keep distortions to a minimum, are limited to viable firms with temporary financing problems, and avoid the perception that some companies are "too big to fail." Directors stressed that a durable solution to the problems in th e bond market will require restructuring efforts aimed at reducing leverage in the corporate sector."³⁶

　

Furthermore, the IMF has recently also stated³⁷: "The government also extends loans and guarantees for commercial operations through the budget, but it also provides such support outside the budget, which amount to hidden subsidies to loan and guarantee recipients." And advises: "The government should take the opportunity, now that the effects of the financial crisis are waning, to reassess and more clearly define its fiscal role by reducing public sector direct involvement in the corporate and financial sectors, cutting the subsidy component of the activities of the credit guarantee funds and allowing the corporate and financial sectors to be run purely on a commercial basis. The fiscal consequences of any remaining government participation in the financial and corporate sector should be clearly reported and have an explicit budgetary authorization".

　

The above framework shows that private financial institutions (i) were themselves in the process of being restructure, (ii) were financially weak, (iii) were partly or totally owned by GOK and (iv) essentially dependent on GOK for their future liquidity. In these circumstances they were called upon to take decisions concerning their participation in the corporate restructuring process the latter being a cornerstone of GOK's policy towards the management of the financial crisis. Even though the workout/restructuring agreements were in theory "voluntary", the package of measures adopted by GOK combined with the mandatory restructuring of the banking sector (under FSC supervision) and the attractive aid packages to banks set clearly the parameters of the framework within which banks were called to act. Indeed, the GOK had (though the FSC) set it as a clear policy objective to convince financial institutions adhere to the CRA. The message was made even clearer by means of GOK declarations that financial institutions not willing to participate to the restructuring would not be aided Considering the financial difficulties of the domestic financial institutions at the time it is difficult to see how an individual bank could have avoided conforming to the governmental guidelines. On the contrary foreign creditors, although given the opportunity, refused to participate to the restructuring process forcing domestic financial institutions and ultimately KAMCO to purchase over the debts they held.

It can, therefore, be claimed that the existence of the framework fulfils the requirement of Article 1.1(a)(1)(iv) of the ASCM and that the banks were effectively entrusted with or directed in organising the debt restructuring of the corporations involved.

　

In the light of the above analysis, assistance granted under the workout scheme to Daewoo constitutes a financial contribution within the meaning of Article 1.1(a)(1)(iv) of the ASCM.

　

The benefit conferred on Daewoo Shipbuilding & Marine Engineering Co Ltd (DSME), would constitute of the amount of the debt forgiven through the spin-off, the conversion of debt to equity and of the interest saved through the rescheduling of repayment periods or the adjustment of interest rates. It is estimated at won 2,960 billion (US$ 2.26 billion). See Annex for details.

　

GOK argued that there is no benefit since financial institutions acted following commercial considerations . It is, therefore, necessary to examine whether the terms of the restructuring involved measures which placed the restructuring firms in a position which they would not have obtained in the market, if the banks had acted purely on commercial considerations. In other words, if the banks would have acted likewise in the absence of the GOK framework there would be no benefit within the meaning of Article 1.1(b) of the ASCM. To determine this, it is necessary to examine the position of each Korean shipbuilder separately, as the equityworthiness or creditworthiness of each shipbuilder may be different.

　

With regard to Daewoo there are elements which indicate that the financial institutions have not acted following commercial considerations:

　

　

If, in addition one considers the involvement of these banks in other corporate workout deals the mere size of the total losses incurred would have practically guaranteed the collapse of the banks themselves⁴¹ FSS has stated that Korea's 22 commercial and specialised banks incurred a combined loss of won 4.2 trillion and won 5.5 trillion in 2000 and in 1999 respectively; KDB alone incurred losses of won 1.4 trillion in 2000. No commercial oriented bank would have preferred to go itself bankrupt rather than its debtors. Had the GOK not encouraged financial institutions to enter into such deals essentially guaranteeing their future liquidity (see analysis above under the issue of direction) it is very questionable whether financial institutions could have afforded to enter such "onerous" debt restructuring deals. The knowledge that in case of liquidity problems GOK can ultimately intervene, has certainly facilitated such a choice.

With regard to the issue of specificity CESA claims that decisions concerning the debt forgiveness, debt-to equity conversions and interest relief appear uniformly to have been made outside the framework of normal reorganisation proceedings and, as such, are therefore specific to shipbuilding enterprises.

CESA claims that in carrying out the reorganisations the Korean banks, together with the Government, essentially designed the individual terms of each company's debt rescheduling plan and implemented the terms apparently without any requirement to follow otherwise genrally applicable reorganisation principles and practices as those contained in the Company's Reorganisation Act of Korea.

　

Article 3.1 of the ASCM state that subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, are prohibited. Footnote 4 to Article 3.1 states that the export contingency standard is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. Furthermore, Article 2.3 states that any subsidy falling under the provisions of Article 3 shall be deemed to be specific.

　

The GOK has stated in its reply that virtually all new shipbuilding orders made in the IP were for exports (200/201 in 1997, 175/175 in 1998, 223/226 in 1999, and 187/189 in 2000). However, in accordance with footnote 4, the mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy. The fact, there fore, that all orders are exported would not have normally sufficed on its own to support an export contingency argument.

　

Evidence was, however, found which indicated that the GOK was particularly attentive with respect to companies which exported. In particular, with regard to eligibility for corporate restructuring, KDB's website informs that decisions were not in all cases on a neutral or objective manner: In particular, in answering the question "What role does KDB play in the corporate restructuring efforts?" A senior manager of KDB replies: "KDB, in cooperation with other Korean creditor banks, has identified 56 companies suffering from temporary lack of liquidity and is supporting the recovery of these companies through tailored workout programs. As the commercial banks have undergone extensive restructuring and have been limited in their ability to provide new credit, KDB has selectively supported a number of credit-worthy export oriented companies and small/medium enterprises experiencing temporary liquidity problems."⁴² (emphasis added)

Considering that Korea was in a midst of a financial crisis it is only natural that KDB might have been tempted to give preference to companies which could obtain valuable foreign currency. As demonstrated above shipyards were the ideal candidate for such action in view of their export potential. The above comment of KDB is all the more important considering that KDB was the main creditor of Daewoo (and as explained below also of Daedong and Halla). KDB's decision to grant aid to the abovementioned shipbuilding companies could have, therefore, been influenced by such export-oriented policy considerations. There is an indication, therefore, that subsidies granted in the context of corporate restructuring could be considered export contingent within the meaning of Article 3 of the ASCM.

　

Notwithstanding the above, there is very strong evidence which shows that the subsidy was specific to Daewoo as explained below.

　

-De jure specificity: Workout scheme limited to certain enterprises

　

Article 2.1(a) of the ASCM expressly provides for a finding of specificity where the authority "expressly limits access to a subsidy to certain enterprises".

The GOK and KSA have claimed that the workout scheme is not specific as it has covered a wide number of sectors. However, with regard to coverage, it has been established that the GOK has prescribed the out-of-court workout programme only for the so called second tier chaebol which rank 6-64. The programme is, therefore, primarily addressed to these sixty industrial groups. To the extent therefore that the special reorganisation plans only concerned a limited number of enterprises and did not apply to all potential companies in difficulties in Korea the plans can be considered as specific to the beneficiary companies.

　

　

The GOK and KSA have also claimed that the workout scheme is not specific since eligibility to the scheme is objective as decisions are made by the financial institutions themselves on the basis of the viability of the prospective beneficiary. Article 2.1(b) of the ASCM provides that the granting authority must establish "objective criteria or conditions governing the eligibity for, and the amount of, a subsidy" and that "the eligibility is automatic and that such criteria and conditions are strictly adhered to" (emphasis added).

With regard to eligibility, GOK provided information that any company meeting the eligibility criteria has the right to apply for a workout plan. The eligibility, however, is limited to the application of the candidate company to the creditor banks; acceptance of a plan is not automatic. In view of the fact that workout plans are decided by creditor banks on an ad hoc basis each restructuring package is different and affects only the company subject to the plan in question. The decision of banks to provide, or not, assistance to a company is purely discretionary; indeed GOK has insisted that the decisions are on a voluntary basis. There is no mandatory action prescribed by the law nor any penalty in case similar situations are treated differently. As a result eligibility of a company to assistance is not automatic as creditors need not justify a refusal to grant assistance to a "viable" firm or grant assistance to a non-viable one. For example, in the latest creditor bank appraisal of viable companies of 3 November 2000 certain companies received "special treatment" although not meeting the relevant criteria.⁴³ Furthermore, there are no objective conditions governing the amount of the debt relief. It is solely up to the creditors' discretion to determine the amount of debt relief. It is thus, possible to grant different amounts of debt relief to companies in the same situation.

The GOK undertook to take specific action to respond to the Daewoo crisis aiming to fundamentally restructure the Group. In particular, the GOK announced a comprehensive financial market stabilisation package that outlined the loss sharing plans of Daewoo's creditor banks. The package included, inter alia, provisions for:

　

In announcing the package MOFE Minister Kang Bong-Kyun said "The latest measures are expected to speed up Daewoo group's workout plans and dispel financial market anxiety in a transparent comprehensive manner".

　

IMF has even commended the Korean authorities "for the speed with which they have drawn up the framework for the complex restructuring of the conglomerate". They also "welcomed the authorities' willingness to place Daewoo affiliates in workout arrangements with their creditors. Directors noted that it is critical for the government to ensure that the final workout plans go beyond financial restructuring to operational restructuring through asset sales, liquidation of nonviable companies, and other forms of business restructuring, and that the workout agreements are fair and transparent with equal treatment of domestic and foreign creditors. With regard to other large conglomerates, Directors welcomed the authorities' intention to make greater use of reglatory powers and sanctions to ensure that they continue to restructure."⁴⁵ :(emphasis added)}

　

In conclusion, the fact that the workout scheme applied selectively to large firms in difficulties which owed particularly large debts to certain, mainly public, classes of creditors confirms that the subsidies provided to Daewoo under its workout plan are deemed to be specific within the meaning of the ASCM.