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The South Korean government said it would be expanding the provision of liquidity to more than KRW50 trillion or about $34.7 billion in an effort to reduce tensions in corporate bond and commercial paper (CP) markets. It said that this move would also avert the possible liquidity setback.
According to The Korea Times, every local government in the country will implement payment guarantee obligations related to issuances of any asset-backed commercial paper or ABCP, with the goal of uprooting growing market concerns on short-term corporate debt.
The new investment comes as the corporate bond and CP markets in South Korea faced a heightened risk of a credit crunch after a Legoland Korea developer defaulted on KRW205 billion in project financing ABCP that was guaranteed by Gangwon Province, where the theme park is located.
The past weekend, the nation’s key economic leaders held an emergency meeting to tackle the issue at Seoul’s Korea Federation of Banks building. It was attended by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung Ho, Bank of Korea (BOK) Governor Rhee Chang Yong, Senior Presidential Secretary for Economic Affairs Choi Sang Mok, Financial Supervisory Service (FSS) Governor Lee Bok Hyun, and Financial Services Commission (FSC) Chairman Kim Joo Hyun.
After forming a conclusion on the right stabilization measures to take, the government announced them publicly. Some of the points mentioned are: the government will begin purchasing PF-ABCP as well as corporate bonds and CPs using a KRW20 trillion bond market stabilization fund starting this week.
In addition, the maximum buying limit of corporate bonds and CP in State-led banks will be hiked up to KRW16 trillion. This amount is double the previous cap, which was only KRW8 trillion.
"First of all, the government will expand its liquidity provision programs by up to '50 trillion won and plus alpha' to prevent a further spread of market concerns over a credit crunch in short-term funding markets," Finance Minister Choo said. "The government will proactively respond to the real estate market's project financing (PF) concerns. The finance ministry once again vows that every Korean local government will complete their obligations related to their ABCP."
