Government Suffers Credibility Crisis
By Kim Tae-gyu
Staff Reporter
The Korean financial market reacts to government policies swiftly, but the problem is that it responds in the opposite direction against policy goals.
The Financial Services Commission (FSC) announced Thursday that it plans to create a 10 trillion won fund aimed at stabilizing the struggling bond market.
The commission said the fund would help lower the interest rates on bonds across the board, thus reducing the costs companies incur from raising cash through issuances.
However, the bond market simply headed the other way.
The interest rates on both three-year and five-year bonds rocketed by 0.3 percentage points Thursday closing at 5.24 percent and 5.44 percent, respectively.
A similar event took place Nov. 6 when four state-backed agencies said that they would generate a 515 billion won fund geared toward boosting plummeting share prices.
The benchmark KOSPI ended its five-session winning streak that day diving 7.56 percent.
Although many factors such as the overnight plunge in the United States were responsible for the free fall, the announcement on the fund did not help stabilize share prices at all.
Credit Crunch & Credibility Crunch
Experts point out that the negative responses of the market to public policies are attributable to the government’s lack of credibility.
``The market consensus is that the government has a dearth of credibility. People suspect whatever policies the government comes up with. That’s one of the reasons why any announced policy does not work,’’ Choi Seong-lak, an economist at SK Securities, said.
``In this sense, the government is suffering from the credibility crunch, which is comparable to the ongoing credit crunch. It is not a fault of the market but a fault of the government. To address the credit crunch here, Korea needs to weed out the credibility crunch first,’’ he said.
Yoo Jang-hee, professor emeritus at Ewha Womans University, also stressed the importance of credibility.
``Instead of churning out as many rescue plans as possible, the government is required to execute quickly what has been already announced,’’ Yoo said.
``Otherwise, the government will not be able to recover its credibility, which is extremely significant to getting the economy get back on track,’’ he said.