Gov't to inject over $35 bil. into markets to avert liquidity crisis

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, center, walks into a conference room with Financial Services Commission (FSC) Chairman Kim Joo-hyun, left, Senior Presidential Secretary for Economic Affairs Choi Sang-mok, second from left, Bank of Korea (BOK) Governor Rhee Chang-yong, second from right, and Financial Supervisory Service (FSS) Lee Bok-hyun, right, to hold an emergency macroeconomic meeting held at the Korea Federation of Banks in central Seoul, Sunday. Yonhap

Economic chiefs vow to stabilize short-term money markets

By Anna J. Park

The government said Sunday that it will expand the provision of liquidity to over 50 trillion won ($34.7 billion) hoping to ease jitters in the country's corporate bond and commercial paper (CP) markets and prevent a possible liquidity crisis.

It also said that every local government in Korea will fulfill payment guarantee obligations linked to issuances of any asset-backed commercial paper (ABCP), aiming to remove growing market concerns about short-term corporate debt.

The country's corporate bond and CP markets have recently been facing an increased risk of a credit crunch, following a Legoland Korea developer defaulting on 205 billion won in project-financing (PF) ABCP guaranteed by Gangwon Province.

The government announced the stabilization measures after key economic chiefs, including Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, Senior Presidential Secretary for Economic Affairs Choi Sang-mok, Financial Services Commission (FSC) Chairman Kim Joo-hyun, Bank of Korea (BOK) Governor Rhee Chang-yong and Financial Supervisory Service (FSS) Governor Lee Bok-hyun held an emergency macroeconomic meeting at the Korea Federation of Banks in central Seoul, Sunday afternoon.

“The government and BOK shared a common understanding that the current market conditions are very severe due to complicated internal and external factors. The government will respond to the market's anxiety with every possible policy in a timely manner,” the finance minister said, vowing that the government will closely cooperate with related agencies to push ahead with market stabilization measures.

“First of all, the government will expand its liquidity provision programs by up to '50 trillion won and plus alpha' to prevent a further spread of market concerns over a credit crunch in short-term funding markets,” Choo added.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, right, speaks during an emergency macroeconomic meeting at the Korea Federation of Banks in central Seoul, Sunday. Yonhap

In detail, the government will resume purchasing PF-ABCP, corporate bonds and CPs by using a 20-trillion-won bond market stabilization fund beginning Monday. State-led banks' maximum buying limit of corporate bonds and CPs will also be increased to 16 trillion won from their previous cap of eight trillion won.

The government will also provide three trillion won in liquidity to local securities firms that experience temporary cash shortages due to the repayment of PF-ABCP. Korea Housing & Urban Guarantee Corporation (KHUG) and Korea Housing Finance Corporation's cap in guarantee payment programs will be increased to 10 trillion won.

“The government will proactively respond to real estate market's project financing (PF) concerns. The finance ministry once again vows that every Korean local government will complete their obligations related to their ABCP,” the finance minister said.

The country's debt markets, including corporate bond and CP markets, have witnessed increased jitters following the default, early this month of PF-ABCP issued for the construction of Legoland Korea, a theme park in Gangwon Province.

Gangwon Province, which guaranteed to repay 205 billion won financed by a state-led developer's ABCP, failed to meet the deadline to repay the debt early this month, sending shockwaves through the local ABCP and corporate bond markets. Creditors lost confidence in ABCP issued in partnership with local governments, prompting investors to shun even top-rated corporate bonds, causing a credit crunch in the country.

During the past two weeks following the default and bankruptcy of the Legoland Korea developer, the corporate bond market has been almost frozen with increased volatility. Three-year maturity AA- rated corporate bonds saw interest rates spike to 5.736 percent at the end of last week, while three-year maturity treasury bonds also rose to 4.495 percent.

Given that a cumulative 68 trillion won in corporate bonds mature in the first half of next year, the current market anxiety needs to be addressed to avoid an intensifying crisis.

LG Uplus, which never experienced a shortage in demand for its corporate bonds, failed to gather enough investors. During its book-building process from institutional investors, the company only received orders worth 100 billion won out of a scheduled issuance of 150 billion in corporate bonds. It was the first time that a major telecommunications company failed to sell the entire amount of corporate bonds it issued during the book-building process. AA- rated Hanwha Solutions also managed to sell only 13 billion won out of 150 billion won worth of bonds during its book-building process.

Market experts say the repercussions of the credit crunch are expected to continue negatively impacting Korea's bond market if they are not addressed.

“The recent shock in the credit market is expected to negatively impact the local debt market beyond corporate bonds and CP. Normally, the credit market is categorized as a risky asset in the bond market. Thus, a credit market crisis tends to benefit sovereign bonds, which are relatively safer assets. But the current credit crunch crisis that is taking place amid global interest rate hikes and spread increases, government bonds are also expected to bear a significant amount of burden,” Kong Dong-rak, economist at Daishin Securities, said.

Meanwhile, Gangwon Province Governor Kim Jin-tae once again vowed that the local government will repay 205 billion won of debt from the ABCP issued for the Legoland Korea construction.

“As I have repeatedly said, Gangwon Province will repay 205 billion won that it guaranteed in case of GJC's bankruptcy by January 29 next year. The province is currently pushing to allocate budget for it within this year,” the governor said at a press conference on Friday.

GJC or Gangwon Jungdo Development is a special-purpose entity established by the province for the Legoland development project.