| Financial Services Commission Chairman Kim Joo-hyun, left, talks with Financial Supervisory Service Governor Lee Bok-hyun at the National Assembly in Seoul, Monday. Yonhap |
Financial markets respond with relief but criticism rises over government's belated move
By Anna J. Park
Although the local financial industry greeted the government's decision on Sunday to provide over 50 trillion won ($35 billion) in liquidity to address a mounting credit crunch in the corporate bond and commercial paper (CP) markets, the country's financial authorities could face mounting criticism for failing to take measures sooner to address the problem.
Local financial companies, particularly securities firms and capital companies that had invested large sums of money in various types of real estate project financing (PF), responded with relief on Monday over the government's liquidity provision measure announced on the previous day.
Reflecting the market's relief, local bond interest rates also decreased as of Monday morning, with the interest rate on government bonds maturing in three years falling to 4.311 percent, down 18.4 basis points from last Friday. The interest rate on AA-rated unsecured corporate bonds also fell 13.7 basis points to 5.599 percent.
However, some market insiders complained that the government could've acted sooner before jitters spread throughout the local corporate bond market over the past two weeks after a Legoland Korea developer defaulted on 205 billion won in PF ABCP guaranteed by Gangwon Province in early October.
Local short-term funding markets, especially the corporate bond and asset-backed commercial paper (ABCP) markets, had been edging toward a credit crunch crisis during the past couple of weeks, with interest rates reaching record-high levels, while many top-rated corporate bonds failed to find buyers.
Given that the aggregate amount of debt guarantee by local securities firms stands at about 48 trillion won as of now, the government's 50 trillion won injection seems to be effective in mitigating current market anxieties. Yet, a total of 68 trillion won worth of corporate bonds are set to mature either by the end of this year or by the first half of 2023.
Critics say the government's comprehensive measures, including the deployment of a bond market stabilization fund from Monday and an increase in state-run banks' maximum buying limits of corporate bonds and CPs, along with other policies, should have been taken immediately after the default of ABCP issued by the Legoland Korea developer on Oct. 4.
At that time, the government and financial authorities merely said that they strengthened monitoring of market conditions. As authorities stood on the sidelines over the past two weeks, the interest rates of ABCP soared to more than seven percent from around three to four percent a month ago.
"It's been nearly three weeks since the local short-term funding market conditions began to deteriorate. If the government had been faithful to its monitoring role and had taken such market stabilization measures a little bit sooner, market anxiety wouldn't have grown this much," a market insider said, criticizing the government's belated action.
Main opposition Democratic Party of Korea (DPK) Rep. Park Jae-ho, who serves on the National Policy Committee at the parliament ― which oversees the financial regulatory agencies, including the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) ― also urged the authorities to come up with further measures to stabilize the short-term funding markets, while strongly criticizing the FSC's lax and sluggish attitude during the past weeks. The lawmaker also called for the government and the financial authorities to draw up measures to win back the market's trust as well as policies to prevent systemic risks.