FSC chairman calls for a bond boost

As part of a preemptive measure against fallout when the U.S. Federal Reserve starts to taper its quantitative easing, Financial Services Commission Chairman Shin Je-yoon said yesterday the agency should come up with a plan to normalize the country’s frozen corporate bond market.

“The increase in volatility in the financial market is expected to affect the capital market for corporations, including the bond market,” Shin said yesterday during a meeting with FSC executives. “As for corporate bonds, companies in the construction, shipping and shipbuilding industries are struggling to redeem bonds for payment [on time].”

Chairman Ben S. Bernanke said last week the U.S. Federal Reserve is likely to start scaling back bond purchases later this year and end quantitative easing by mid-2014. That has caused corporate bond yields to surge, making it difficult for companies to raise capital, which could eventually lead to downgraded credit ratings.

“[The financial authority] should come up with measures to normalize the country’s corporate bond market to help resolve the capital crunch at corporations and, if needed, enforce the measures at the right time,” Shin said.

According to an official from the FSC, “Various measures are being considered to bring the corporate bond market back to life.”

There have even been concerns about the possibility of companies going bankrupt due to the capital crunch, as high corporate bond yields have left investors reluctant to buy.

Yesterday, the JoongAng Ilbo reported that the financial authority will implement a system in which state-owned banks like the Korea Development Bank purchase corporate bonds nearing maturity this year.

A government official was quoted as saying by the JoongAng Ilbo that Shin soon could announce measures that include state-owned banks purchasing maturing bonds.

According to the report, the government is considering ways to create 10 trillion won in primary collateralized bond obligations backed by the state-run Korea Credit Guarantee Fund. Once the state-owned KDB, for example, purchases corporate bonds newly issued by companies with low credit ratings, the Korea Credit Guarantee Fund will collect them and sell them to investors.

An FSC official, however, refrained from commenting on any details, saying, “All measures to normalize the corporate bond market are being considered.”

Meanwhile, Shin noted that Bernanke’s remarks last week should not be the cause of unnecessary alarm.

“Financial markets at home and abroad are to a certain degree overreacting after Chairman Bernanke’s comments,” Shin said. “What should be clarified, though, is the fact that currently we’re in the process of normalization based on recovery of the real economy.”

BY LEE EUN-JOO [angie@joongang.co.kr]