By Kim Da-ye
Incheon, Gyeonggi Province and Seoul were the top three borrowers among local entities in terms of the volume of municipal bonds they issued, the Korea Exchange data showed Wednesday.
The data also showed local governments are increasingly using bonds to raise funds, which some analysts see as a possible “debt bomb” that could cripple their finances.
Municipal bonds remain an attractive way for local authorities — often heavily indebted ones — to raise funds because their payments are guaranteed by the central government.
The total amount of municipal bonds issued by local governments between January and July has reached 2.9 trillion won.
Incheon topped the list with nearly 700 billion won, followed by Gyeonggi Province with 420 billion won and Seoul with 373 billion won.
Daejeon issued a total of 244 billion won this year, Gwangju, 206 billion won and Busan, 128 billion won.
The total amount of municipal bonds issued by all local governments increased from 2.6 trillion won in 2007 to 2.7 trillion won in 2008 and 4.7 trillion won in 2009. The total debt from the bonds that are maturing stood at 12.7 trillion won in 2007, but the figure rose to 13.5 trillion won in 2008 and 15.7 trillion won in 2009.
The trend raises concerns as mounting debts accumulated by local governments have recently been made public.
Seongnam City practically declared a debt moratorium in mid-July on 520 billion won it borrowed from the central government to finance the Pangyo residential development.
Seongnam has financed a 322 billion won City Hall building through the debt.
The Ministry of Public Administration and Security announced on July 20 that it will strictly limit local governments with poor financial health from issuing bonds and starting new projects
The ministry will also set up a municipal government “debt alarm system” by December this year in order to monitor local governments’ finances and predict any crisis in advance.
Despite local government’s heavy debts, municipal bonds still remain a popular instrument for investors. “Yields of municipal bonds are the highest after that of T-bills because of their safety,” Yoon Il-kwang, an analyst at Daewoo Securities says.
“When Seongnam declared a moratorium, the market took it as a political move, so its effect on the market was small. It is generally assumed that the central government will help in the worst case scenario.”