A strange fund

Columns

Published: 07 Sep. 2020, 19:57

A strange fund

Ha Hyun-ock
The author is the head of economic policy team at the JoongAng Ilbo.

The idea of devising a principal-protected fund is as incongruous as wishing to drink hot and iced coffee at the same time, observed a financial expert upon the government’s announcement of a new 20 trillion won ($17 billion) state-led New Deal fund. He was referring to the suggestion of a principal guarantee on the equity fund to draw public support.

The Korean New Deal fund is an investment vehicle to draw private capital into digital and green projects as part of the five-year New Deal initiative aimed at building momentum in the virus- and recession-stricken Korean economy. The ruling Democratic Party (DP) and government agreed to protect the principal of investments in the fund. They soon tweaked their aim to “pursue a principal guarantee” after experts pointed out the breach in the Capital Market Act that bans any promises of a certain amount of profits or loss coverage to private investors in a fund. The phrase of “principal guarantee” was eventually taken out in the press statement on the fund.

Nevertheless, top policymakers brought it up again during a press briefing. Hong Nam-ki, deputy prime minister for economic affairs and finance minister, stressed that the principal in the fund “will be almost covered.”

On Sept. 3 at the Blue House, President Moon Jae-in, right, is briefed by Finance Ministry officials on how to create a Korean New Deal fund aimed at drawing investments from ordinary citizens. To his left is Deputy Prime Minister Hong Nam-ki, who also serves as Finance Minister. [JOINT PRESS CORPS]

Financial Services Commission (FSC) Chairman Eun Sung-soo explained that since the government would directly invest 7 trillion won — or 35 percent of the master fund — that much of losses in the feeder funds could be covered. “Although principal protection is not stated, the fund would be structured with de facto protection,” he said. Hong added that “the government was virtually providing a guarantee on the minimum investment capital.”

The “virtual” principal protection to avoid an outright breach of the capital law would more or less mean coverage by taxes. If losses are made in the master funds, they would be booked in the accounts of the government and public lenders which invest in them. The government would have to shoulder that much risk with tax revenue or debt. As the New Deal fund is structured to give returns to investors — and at the same time is structured to burden taxpayers with any losses — the scheme is quite embarrassing to ordinary taxpayers.

The assurance of principal guarantee should not be entirely relied upon as the government cannot cover for the losses that exceed the 35 percent ceiling determined by the government. If they lose their money, investors can sue them for the government’s “mis-selling.”

That’s not all. In a follow-up statement, the government said the risk-sharing fiscal role in the fund would be set at around 10 percent. The government contradicted the promise of a 35 percent coverage.

Investors are yet to recover from the mis-selling of derivatives linked to foreign exchange rates. Many have lost their money after believing the agent banks that sold the products with their promise of no risks to the principal. The FSS had to order them to cover 40 to 80 percent of their losses.

Money won’t be lost if the Korean New Deal fund becomes successful.

Announcing the proposals for the fund last Thursday, President Moon vowed to go all-out to see through the projects as “the future of Korea hinges on the New Deal.”

Not all things go as planned. If losses are made, they will have to be compensated from tax revenue.