5 banks buying 95 trillion won of debt to support market

Financial Services Commission Kim Joo-hyun meets with the head of the five leading financial group to discuss liquidity crunch in Seoul on Tuesday. [YONHAP]

Five banks are intervening in the markets by buying 95 trillion won ($67 billion) of debt.

The massive coordinated effort comes after the Legoland-related default and as the government pushes the private sector to complement official initiatives to prevent a bond collapse.

According to the Financial Services Commission (FSC) on Wednesday, the financial groups — KB, Hana, Shinhan, Woori and NH — have agreed to spend 73 trillion won to support companies, including state-owned Korea Electric Power Corp., that have had trouble attracting investor despite their high credit ratings.

Corporate bonds, commercial paper and asset-backed commercial paper will be purchased in the market, while maturities on existing debt will be extended and new loans will be approved.

They will also commit 12 trillion won to a bond and stock-market stabilization fund and 10 trillion won to related financial companies.

“While the bond market experienced some instability after the short-term money market responded sensitively to the Legoland situation, the situation did not worsen after efforts by the government, the Bank of Korea and the financial industry,” said Kim Joo-hyun, FSC chairman during a meeting with the heads of the five banking groups on Tuesday.

The FSC chairman said corporations are bound to face problems as interest rates are rising at an unprecedented pace and the dollar is strengthening rapidly.

“For the government measures to be effective, it needs the participation of market participants on the smooth circulation of capital,” Kim added.

He said the government has been watching project financing in particular since the Legoland default.

On Oct. 4, Iwon Jeil Cha, a special purpose company established to fund the construction of the Legoland resort in Gangwon, was listed as bankrupt. It had failed to repay 205 billion won ($144 million) in asset-backed commercial paper.

Lee said the recent moves are designed to unstick transactions in financial markets stuck because of anxiety. He is especially worried about the credibility of Korean companies.

“We have to prevent the liquidity problem where normal companies are struggling," he said. “No matter how solid a company is, it could be in a difficult situation," if investors lose trust in the company.

He added that the liquidity problem should be solved by the private sector.

“While we are supporting the securities market, the brokerage firms should be doing all it can,” Kim said, noting the institutional investors must assume their responsibilities to maintain an orderly market.

Last week, the FSC advised the institutional investors, including brokerages and major funds, to cease their aggressive selloffs.

The FSC chairman said the government will be changing its monitoring system from evaluating macroeconomic indicators to checking daily on any weak points it might have previously missed.

Kim said while the market is stabilizing, it’s too early to declare victory as there are still uncertainties in the global market.

Kim Kwang-soo, chairman of Korea Federation of Banks, said banks will strengthen their role circulating overflowing deposits back into the real market.

Deposits at banks have been on the rise in the wake of a continued rise of interest rates.

The Bank of Korea’s Monetary Policy Board raised the base rate to 3 percent last month from just 0.5 percent in July last year. Commercial banks in return have also raised the interest rates for deposits.

In September, the weighted average interest rate on new deposits was 3.38 percent, a jump from 1.70 percent in December last year, according to the Bank of Korea.

The rate is projected to rise further along with the central bank’s expected rate increase during this year’s last Monetary Policy Meeting, to be held on Nov. 24.

The bank is forecast to raise the rate by at least 25 basis points to tame inflation that is still above 5 percent and to narrow the rate difference with the Federal Reserve, whose current target rate is 3 to 3.25 percent.

As such, the FSC chairman will be meeting with the heads of the five leading banking groups biweekly until the government is certain that the financial markets have stabilized.

BY LEE HO-JEONG, JIN MIN-JI [lee.hojeong@joongang.co.kr]