Bond-linked debt gives rise to tax nightmares

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Bond-linked debt gives rise to tax nightmares

Korea’s debt from issuing bonds hovered above 700 trillion won ($646 billion) in October, raising concerns about higher tax burdens in the future, data showed yesterday.

According to the Korea Financial Investment Association, the combined amount of state and special bonds needing to be repaid by the Seoul government reached 724 trillion won, up 8.8 percent from the end of 2011.

State bonds amounted to 415 trillion won, which is higher than the country’s 2013 budget of 342.5 trillion won, the data showed.

The amount of special bonds, which refer to debt sales floated by state-owned enterprises, surged three-fold to 309 trillion won in October from the 108 trillion won tallied six years earlier, the data added.

“[The rise in the issuance of special bonds] is attributed to decreasing tax revenues amid the prolonged economic slowdown, while there are limitations to the issuance of state bonds,” said Moon Hong-chul, an analyst at Dongbu Securities.

Governments tend to rely on issuing bonds when securing funds needed to implement new policies as it gives them more leeway than raising taxes, which may bring resistance.

Market watchers said the rise in the country’s debt sales is also attributable to the increased credit ratings on Asia’s fourth-largest economy.

In September, three major global credit appraisers - Moody’s, Fitch and Standard & Poor’s - raised their credit ratings on Korea to levels not seen since before the 1997-1998 financial crisis, citing the country’s fiscal soundness and lowered geopolitical risks.

With a presidential election scheduled for Dec. 19, market watchers said the special bond sales are likely to increase down the road as political parties vie for costly welfare policies.

Combined debt from bonds issued in Korea, including those in the private sector, reached 1,383 trillion won at the end of October, up 7.4 percent from a year earlier, the data showed.

Corporate bonds came to 205 trillion won last month, up 14.5 percent from the end of last year.

Financial firms held a comparable 241 trillion won worth, down 0.8 percent.


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