Fears grow over chain reaction of defaults
The domestic money market has suddenly been thrown into a panic, making it ever more difficult for businesses, particularly construction companies and brokerages, to raise funds. This has created a financial pinch, deepening fears about chain reaction of corporate bankruptcies and a subsequent financial crisis.
The situation has been aggravated by a default on provincial government-guaranteed debt worth 205 billion won ($143 million) raised to finance the construction of a Legoland Korea amusement park in Chuncheon, Gangwon Province. Market jitters were running high as the province refused to honor its payment guarantee and triggered a default on the debt.
The incident has forced investors to withhold their purchase of corporate bonds and other asset-backed securities on mounting fears of debt defaults. It is natural for investors to lose their confidence in the money market when the Legoland debt, known as asset backed commercial paper (ABCP) with a relatively high rating of "A-plus," went sour.
More underlying causes of the worsening financial crunch can be attributed to higher interest rates and falling asset prices which are increasing borrowing costs and default risks for cash-strapped corporations. If the Bank of Korea (BOK) continues to push up its benchmark interest rate following the U.S.' aggressive monetary tightening, the country may face what is reminiscent of the 2008 global financial crisis or a 1997-98 Asian currency turmoil. The risks of default are especially high for construction firms with a heavy reliance on project financing and securities companies with high exposures to such financing.
As things stand now, an increasing number of companies ― even blue-chip companies affiliated with conglomerates ― have given up issuing corporate bonds. Instead, they have turned to bank loans which call for higher lending rates amid the BOK's policy of monetary tightening. This has caused the yield on corporate bonds with a three-year maturity and a "AA-minus" rating to hit a 10-year high of 5.73 percent.
The issuance of corporate bonds shrank sharply from 7.44 trillion won in the first quarter of this year to 883.1 billion won in the second quarter and 272.7 billion won in the third quarter, according to the Korea Financial Investment Association. The sum has reported a net reduction of 2.4 trillion won so far this month, indicating that the bond market has become virtually paralyzed.
More seriously, the money market crash is likely to trigger a vicious cycle of a credit crunch, corporate bankruptcies and a recession which could lead to a financial meltdown and economic woes. That's why financial authorities announced Sunday a set of measures to provide liquidity amounting to at least 50 trillion won in a bid to ease the financial pinch. The steps include the activation of a 1.6 trillion won bond market stabilization fund starting Monday to buy corporate bonds and commercial papers.
The Yoon Suk-yeol administration should do more to prevent the situation from developing into unpredictable consequences. It needs to have a real sense of crisis as the country is facing a trilemma ― soaring inflation, higher interest rates and the rapid depreciation of the Korean won against the U.S. dollar. It must take preemptive action to avert the worst-case scenario. Otherwise, a perfect storm could hit the country down the road.
The domestic money market has suddenly been thrown into a panic, making it ever more difficult for businesses, particularly construction companies and brokerages, to raise funds. This has created a financial pinch, deepening fears about chain reaction of corporate bankruptcies and a subsequent financial crisis.
The situation has been aggravated by a default on provincial government-guaranteed debt worth 205 billion won ($143 million) raised to finance the construction of a Legoland Korea amusement park in Chuncheon, Gangwon Province. Market jitters were running high as the province refused to honor its payment guarantee and triggered a default on the debt.
The incident has forced investors to withhold their purchase of corporate bonds and other asset-backed securities on mounting fears of debt defaults. It is natural for investors to lose their confidence in the money market when the Legoland debt, known as asset backed commercial paper (ABCP) with a relatively high rating of "A-plus," went sour.
More underlying causes of the worsening financial crunch can be attributed to higher interest rates and falling asset prices which are increasing borrowing costs and default risks for cash-strapped corporations. If the Bank of Korea (BOK) continues to push up its benchmark interest rate following the U.S.' aggressive monetary tightening, the country may face what is reminiscent of the 2008 global financial crisis or a 1997-98 Asian currency turmoil. The risks of default are especially high for construction firms with a heavy reliance on project financing and securities companies with high exposures to such financing.
As things stand now, an increasing number of companies ― even blue-chip companies affiliated with conglomerates ― have given up issuing corporate bonds. Instead, they have turned to bank loans which call for higher lending rates amid the BOK's policy of monetary tightening. This has caused the yield on corporate bonds with a three-year maturity and a "AA-minus" rating to hit a 10-year high of 5.73 percent.
The issuance of corporate bonds shrank sharply from 7.44 trillion won in the first quarter of this year to 883.1 billion won in the second quarter and 272.7 billion won in the third quarter, according to the Korea Financial Investment Association. The sum has reported a net reduction of 2.4 trillion won so far this month, indicating that the bond market has become virtually paralyzed.
More seriously, the money market crash is likely to trigger a vicious cycle of a credit crunch, corporate bankruptcies and a recession which could lead to a financial meltdown and economic woes. That's why financial authorities announced Sunday a set of measures to provide liquidity amounting to at least 50 trillion won in a bid to ease the financial pinch. The steps include the activation of a 1.6 trillion won bond market stabilization fund starting Monday to buy corporate bonds and commercial papers.
The Yoon Suk-yeol administration should do more to prevent the situation from developing into unpredictable consequences. It needs to have a real sense of crisis as the country is facing a trilemma ― soaring inflation, higher interest rates and the rapid depreciation of the Korean won against the U.S. dollar. It must take preemptive action to avert the worst-case scenario. Otherwise, a perfect storm could hit the country down the road.
![[LIFE'S OLLE TRAILS 1] How hiking Jeju's 437km of trails changed my life](https://img.koreatimes.co.kr/upload/thumbnailV2/76a9bfb384714b8d8bb0078962a18259.jpg/dims/resize/178/optimize)
![[INTERVIEW] 'One Day Off' star Lee Na-young, director on creating subtle, feel-good series](https://img.koreatimes.co.kr/upload/thumbnailV2/796618f56a44402eabe81fe4530ab988.jpg/dims/resize/178/optimize)
