Korean stock and debt markets relieved as Seoul packages $35 bn liquidity aid program

South Korean capital markets turned positive Monday after authorities hurriedly packaged liquidity relief fund of minimum 50 trillion won ($35 billion) to stabilize the panicky debt market as a default by a local government-backed securities related to Legoland amusement park in Gangwon Province worsened crunch from rapid rises in interest rates.

Under liquidity support program pledged by the government on Sunday, at least 50 trillion won will be deployed for corporate bond buyback, liquidity support to securities companies, and enhanced guarantee for public housing projects.

Initially, 20 trillion won would go to stabilize the bond market, 16 trillion won to buy corporate bond and commercial papers, 3 trillion won to bolster liquidity for brokerages, and 10 trillion won in funding guarantee for Korea Housing & Urban Guarantee Corporation and Korea Housing Finance Corporation.

The program was unveiled after an emergency meeting on Sunday among Economy and Finance Minister Choo Kyung-ho and chiefs of the central bank and financial regulators.

Financial markets welcomed the action.

Kospi ended 1 percent and Kosdaq 2.08 percent higher Monday. The three-year government bond yield fell 18 basis points to 4.311 percent, the five-year bond 15 basis points to 4.485 percent. The unsecured three-year BBB- yield retreated 13.8 basis points to 11.453 percent from Friday when it hit highest since January 2010 in the wake of global financial crisis.

Even large companies have been having trouble in issuing new debt on growing skepticism over short as well as long-dated issues after a local government-backed debt went sour.

Slow response from authorities has worsened sentiment.

The Financial Services Commission (FSC) pledged active intervention to bolster liquidity.

FSC will immediately deploy 1.6 trillion won in bond stabilization fund reserve and allow banks to maintain their liquidity coverage ratio (LCR) at current 92.5 percent level until June next year. LCR is the requirement banks must have in reserve at hand to fund cash outflows for 30 days.

“We will do everything beyond the basic rules for the time being,” said FSC Chairman Kim Joo-hyun. “We will defer LCR further and amend loan-deposit ratio on market needs.”

Authorities will respond faster to unexpected factors like the Legoland incident and ensure local governments uphold debt guarantee obligations.

A special purpose company under the government of Gangwon Province set up to finance the construction of Legoland theme park in Gangwon Province fell behind payment on maturing commercial papers. Instead of paying on behalf under debt guarantee, the government chose to file for court receivership for the developer.

Gangwon government withdrew court receivership filing and promised to complete full payment of 205 billion won ($142 million) by Jan. 29.

Speedy expedition of the buyout program would be necessary to restore market confidence.

“It took about one month for the government to deploy bond stabilization fund in 2020,” said an unnamed official from a brokerage.

According to NICE Investors Service on Sunday, project financing backed by securities and construction firms maturing at the end of this year amount to 32.39 trillion won and 57.4 trillion won by June next year.

According to multiple sources from the bond industry, about 14 trillion won worth of corporate bonds face maturity by December and 68 trillion won by June.

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]