A Big Wave of Bank Bonds Due Soon
By Lee Hyo-sik
Staff Reporter
Early next year will likely be another watershed in Korea's struggle for a soft landing, with a record amount of bank bonds coming to maturity. Businesses and households are also having a tough time making debt payments amid soaring interest rates and stagnant income.
The ongoing credit crunch and unstable financial market conditions were caused by foreigners' massive selling of local shares and bonds in the wake of the U.S. financial market meltdown, increasing the dollar outflow and making the won weaker against the greenback. It has made it almost impossible for banks to borrow money from foreign financial institutions amid a global credit crunch or to raise new funds through bond issuance here due to a lack of demand.
Faced with a liquidity shortage, they have tightened lending standards for businesses and households. With tight credit conditions and other unfavorable economic variables at home and abroad, many companies are on the verge of collapse, while more families have become unable to make interest payments on mortgages and other borrowings, pushing up the loan default rate.
Rising non-performing loans will further weaken the financial soundness of banks and other financial services firms, and force them to further tighten lending rules, aggravating the ongoing credit squeeze and its negative fallout on economic activities.
Analysts say if the nation can effectively handle the record-amount of maturing bonds in the first three months of 2009, the domestic financial market will become more stabilized.
According to the banking industry Sunday, outstanding bonds issued by domestic banks totaled 183 trillion won as of September. Of the 183 trillion won, bonds worth 21.2 trillion won will mature in the first quarter of the next year, up from 20.7 trillion won in the fourth quarter, posing a challenge for lenders to either renew maturing debts or issue new bonds to service maturing ones.
Additionally, corporate bonds worth 3.9 trillion won are scheduled to mature in the first quarter of 2009, up from 3 trillion won a quarter earlier, while households will have to pay back mortgage principal and interest worth up to 50 trillion won in the first half of the year. Of 383.6 trillion won banks extended to households, 234.6 trillion won were home-backed loans as of September.
LG Economic Research Institute economist Bae Min-keun said sluggish domestic consumption and falling exports have worsened businesses' bottom lines and household finances, adding a growing number of companies and families will default on debts, hitting lenders hard.
With soaring bond yields and plunging prices due to lack of demand, bonds issued by banks and companies have decreased sharply in recent months even though they need fresh funds. Lenders issued bonds worth 4.2 trillion won in October, down 23 percent from a month earlier, while corporate bond issuance totaled 1.4 trillion won, down 27.7 percent.
Against this backdrop, the government plans to establish a 10-trillion won bond stabilization fund to boost demand for corporate bonds, and thus help banks and businesses raise money through the market.
Separately, it is seeking to inject public funds into struggling local lenders to help them improve their financial status so that they can extend more credit to cash-strapped small businesses.