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| Bank of Korea (BOK) Governor Rhee Chang-yong, right, talks with Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho during the National Assembly's comprehensive audit on the central bank and the finance ministry in Yeouido, Seoul, Monday. Yonhap |
By Yi Whan-woo
The default on debt payments surrounding Asia's largest Legoland theme park, which opened in Korea recently, is posing a dilemma for the Bank of Korea (BOK), which needs to tighten its monetary policy and, at the same time, supply liquidity to bond and short-term money markets.
Companies' borrowing capacities have been drying up, as the BOK has been delivering rate hikes at a faster pace and investor sentiment has weakened toward corporate bonds and commercial papers.
Such fragile liquidity deteriorated further last week when the developer of the Legoland theme park defaulted on overdue payments worth $142.3 million.
Investors were spooked because the top-rated short-term papers were backed by Gangwon Province in what many saw as a provincial guarantee against any insolvency.
Under the circumstances, the BOK said it will consider taking its own liquidity supply measures in the joint efforts addressed on Sunday by the financial and monetary authorities to calm corporate bond market jitters.
For instance, the BOK was requested to reintroduce its now-terminated pandemic stimulus policy, in which firms that are stable yet face a short-term liquidity crisis can take out loans from the BOK with their corporate bonds as collateral.
Still, the measure will only be possible if the BOK's macroeconomic monetary policy remains unchanged, as issues on liquidity risks are temporary and are particular to commercial papers, according to BOK Governor Rhee Chang-yong.
Rhee's view comes amid speculation that the BOK, on its path to taming inflation, is open to delivering its third massive interest rate hike by half a percentage point in its final rate-setting meeting of this year in November.
The hike, if realized, will certainly increase liquidity risks after the BOK took its second 50-basis-point hike earlier this month, returning the nation's benchmark interest rate to 3 percent for the first time since October 2012.
"The BOK is facing a tricky job of dealing concurrently with two colliding issues ― tight money supply and liquidity supply ― so that it can counter upward inflationary pressure while helping out financially tight firms," said Yang Joon-suk, a Catholic University of Korea professor.
Daishin Securities analyst Kong Dong-rak positively assessed the joint efforts addressed by the authorities. "It is noteworthy that the authorities came together to rein in market risks escalated by the Legoland crisis," Kong said.
"Nevertheless, whether the risks can be settled completely remains unclear, as inflation is still high and the BOK is likely to continue embracing its credit tightening policy."
