Government to expand liquidity programs to calm corporate bond market

Finance

Published: 23 Oct. 2022, 18:09

Government to expand liquidity programs to calm corporate bond market

Finance Minister Choo Kyung-ho, center, and Financial Services Commission Chairman Kim Joo-hyun, second from right, pose with other officials as they enter a meeting held in central Seoul on Sunday to discuss market stabilization measures. [BANK OF KOREA]

Korea's financial authorities announced plans to expand funding for liquidity programs to at least 50 trillion won ($35 billion) on Sunday in an effort to calm corporate bond market jitters.

Finance Minister Choo Kyung-ho admitted the current market situation is “very severe” and vowed to “fully mobilize policy measures available” at a meeting held in central Seoul to discuss corporate bond and short-term funding markets.

The meeting was attended by Bank of Korea Gov. Rhee Chang-yong, Financial Services Commission (FSC) Chairman Kim Joo-hyun and Financial Supervisory Service Gov. Lee Bok-hyun.

Choo said policy coordination will take place among not just the financial circle but also Ministry of the Interior and Safety and Ministry of Land, Infrastructure and Transport.

The government said it will expand funding for the liquidity program to at least 50 trillion won amid growing concerns in the corporate bond and short-term money markets and to prevent a liquidity crunch.

The government will activate a 1.6 trillion won "bond market stabilization fund" starting Monday. A 10 trillion-won bond market stabilization fund was activated in 2008. Three trillion won was created following the Covid-19 pandemic and 1.4 trillion won was injected to stabilize the market.

Corporate bonds and commercial papers will also be bought as part of the liquidity program. Additional capital calls, the act of collecting funds from limited partners whenever the need arises, will be executed from early November.

The ceiling for corporate bond-buying programs by banks, including Korea Development Bank, will also be raised to 16 trillion won from the current 8 trillion won. Commercial papers issued by financial companies, like securities firms, will be included as part of the assets that can be purchased.

The goal is to stabilize the uncertainty caused by project financing, including a default on municipal government-guaranteed debt worth 205 billion won raised to finance the construction of Legoland Korea amusement park in Gangwon.

A special purpose company established by Gangwon Jungdo Development to fund the construction of Legoland Korea failed to pay the amount in asset-backed commercial paper and was listed as bankrupt as of Oct. 4 by the Korea Financial Telecommunications & Clearings Institute.

Legoland Korea Resort opened on May 5 on Jungdo Island in Chuncheon, Gangwon, 75 kilometers (47 miles) northeast of Seoul. The amusement park’s developer is 44 percent owned by Gangwon Province.

Securities firms, including Shinhan, Samsung, Mirae Asset and Daishin, purchased the 205 billion won in the asset-backed commercial paper issued by the special purpose company.

To support the struggling securities firms, the government will supply 3 trillion won to provide liquidity to the companies utilizing the fund offered by the Korea Securities Finance Corporation, Choo said Sunday.

Choo added the government will quickly come up with specific measures to support the overall project financing market and to prevent rumors that escalate market concerns.

“How the market situations will change is unknown, so [the financial authorities plan to] take all measures necessary through communication with the market,” said FSC Chairman Kim on Sunday. The commission will “promptly respond to unexpected variables,” he added, referring to Legoland.

BY JIN MIN-JI [jin.minji@joongang.co.kr]