The Liz Truss of Korea

Ha Hyun-ock

The author is head of the finance team at the JoongAng Ilbo.

Liz Truss, the disgraced former British prime minister, and Gangwon Governor Kim Jin-tae were more unlucky than ignorant. The two conservative politicians could not have foreseen the devastating effects of their actions on the financial markets.

Truss who aspired to become the second successful female British prime minister after Margaret Thatcher caused far-reaching tantrums in the London and other financial markets with her signature package of 45 billion pound ($51 billion) tax cut disproportionately favoring the country’s wealthiest. She wanted to put into action her lifelong creed of “small government, low tax.”

When tax revenue falls, government coffers should be filled with debt. But the UK’s fiscal health was already in bad shape. Government liabilities reached a whopping 154 percent of the GDP as of March. Moreover, the Bank of England (BoE) — the central bank of the UK — was poised to sell government bonds to curb inflationary pressure by absorbing surplus liquidity in the market.

Bond prices tumbled at the risk of a surge in government bond supply. UK pension funds were hit hard. After prices of government bonds plunged, pension funds running billions of pounds dumped their assets to meet margin calls on derivatives they used to hedge to help pay retirees. The crisis of one of the world’s largest pension funds rocked financial markets across the globe.

The BoE started calming the convulsion by suspending a plan to sell government bonds and instead buying them. An ironic situation of tightening money supply through rate hikes and releasing liquidity to the market through buying government bonds took place. JP Morgan estimated that the British pension funds would have lost at least 150 billion pounds from the tax cut plan. The UK eventually dumped the proposal.

Truss resigned on October 20, 44 days after taking office to become the shortest-serving prime minister of the UK. Despite the disaster she left behind, she would be eligible to pick up 115,000 pound in annual pension for her service of less than two months.

Kim Jin-tae, the governor of Gangwon, has caused chills in Korea’s bond market after filing for court receivership for a local government company developing the Legoland project in Chuncheon city in the province. A default by a local government-backed special purpose company (SPC) provoked panic at a number of construction companies and brokerage houses that had been guaranteed of their profit by the local government.

The Gangwon Jungdo Development Corp. (GJC) under the provincial government set up an SPC in 2020 to issue 205 billion won ($142 million) of asset-backed commercial paper (ABCP) backed by the Gangwon province.

Kim Jin-tae, left, governor of Gangwon, expresses a vision for the province on June 16 after winning the local election two weeks earlier. British Prime Minister Liz Truss addresses the UN General Assembly in New York, September 21. She resigned a month later after taking responsibility for her policies that triggered turmoil in financial markets. [KIM KYUNG-ROK, AFP/YONHAP]

On September 28, Gov. Kim announced he would file for a rehabilitation program for the GJC with the bankruptcy court, as it would fail to meet its repayment obligations. The governor was skeptical of Legoland Korea pursued by his predecessor and refused payment guarantees. Investors turned wary of other public financing projects .

Demand for Korean ABCPs, short-term commercial paper, and other corporate bonds turned cold. Credit card and capital financing companies and lower-grade debt issuers could not raise immediate funds. Since companies rushed to banks, lenders had to issue short-term debt to meet their demands, worsening conditions for bond markets.

Financial authorities vowed a buyout through a stabilization fund. Gov. Kim promised to fulfill repayment guarantee in January. But the confidence has been lost. The financial markets have become a prey for reckless moves from politicians.