It is imperative that we strengthen financial reforms or run the risk of facing another economic recession

Jin Nyum, Korean Finance Minister

Daewoo, which owes billions of dollars, was declared insolvent after defaulting on $155m of debt.

But Korea's finance minister Jin Nyum said that it was vital that the country carried on with economic reforms and restructuring.

"With an uncertain financial market and loss of credibility among domestic and foreign investors, it is imperative that we strengthen financial reforms or run the risk of facing another economic recession," he said.

Further bankruptcies

There are fears that Daewoo's financial difficulties will create a chain reaction of bankruptcies among subcontractors and suppliers whose survival depends on the company.

Talks with union leaders failed

Bupyong, west of the South Korean capital Seoul, can produce up to 500,000 passenger cars each year but has been operating at half capacity because of slow sales.

Daewoo's two other plants, in the south of the country, are still operating normally but are also expected to stop production when they run out of parts.

Daewoo failed to agree with trade unions the number of job cuts demanded by its creditors - but hopes to now go ahead with its planned reductions.

The company is now expected to go into receivership amid fears that the bankruptcy will jeopardise plans to sell it to US automobile giant General Motors and its Italian partner Fiat.

But company spokeswomen Alison Moran says that despite the insolvency, production will continue as normal.

New management will be appointed. The future of almost 27,000 jobs is uncertain.

In the UK, about 500 workers employed in Worthing, West Sussex, will be affected.

They had been told in September that there was no money to pay their wages, although they were eventually paid last month.

Daewoo officials said the company had no resources left to service $155m in debt this week. The company owes its creditors $10.6bn.

Deadline

Creditors had initially set a deadline of Tuesday afternoon for the firm to pay some of its outstanding debts, later extending the deadline until Wednesday morning.

Up to 52 South Korean companies are deemed to be "non-viable" by their creditors, putting up to 200,000 jobs at risk. The total number of unemployed in South Korea currently stands at about 800,000 or 3.65%.

Firms like Daewoo were caught out by the Asian financial crisis in the late 1990s, when a sudden economic downturn cut off the cash flow needed to service mounting debts.

South Korea's huge industrial conglomerates, the family-owned chaebol, had piled debt upon debt to finance their rapid expansion programmes.

Daewoo was rescued by its banks in August 1999 and a debt rescheduling programme began, aimed at selling off the firm or its assets.

Cutting the workforce

Last month, Daewoo put forward plans aimed at getting a fresh injection of funds which included cutting about a fifth of its workforce.

But the banks refused to sink more money into the company unless workers accepted the job cuts.

The unions insisted that creditors and management must pay wage arrears of $100m before they would contemplate job cuts and wage freezes.

The impact of Daewoo's collapse will be felt far beyond the country's borders.

As well as having a design centre in the UK, it operates factories in India, China, Poland and Uzbekistan.