S.Korea steps back to ease credit crunch that was triggered by Legoland developer default By Stocksak

© Stocksak. FILE PHOTO – South Korea’s new central banking governor Rhee Changyong speaks at his inauguration ceremony in Seoul (South Korea), April 21, 2022. SeongJoon Cho/Pool via REUTERS

By Cynthia Kim

SEOUL (Stocksak), South Korea’s central bank has announced additional measures to improve liquidity in the banking sector and reduce the fallout from a debt default by a developer. This is causing fears of a credit crisis in Asia’s fourth largest economy.

Gangwon Jungdo Development Corp. missed bond payments of 205 billion won ($144,000,000) due Sept. 29.

Investors were shocked to learn that the debts, which were asset-backed commercial papers guaranteed by the local government, were rated A1. There are about 10 local brokerages among the debt holders.

The default has caused a sudden freeze in short-term money markets in the nation, just as the Bank of Korea’s 250-basis points worth of rate increases since mid-last year are threatening the once-booming property sector. Local brokerages are also heavily affected by real estate project finances.

There are growing signs that Korean companies are having difficulty obtaining financing against the backdrop volatile global financial markets, and China’s property crisis. This is something the BOK will need for as analysts expect policy rates of 3.50% to rise next year.

On Thursday, data showed that South Korea’s economy experienced its slowest growth in a year during the third quarter.

Since Sunday, policymakers announced a flurry to inject more money into financial system. These included the doubling of a corporate-bond-buying facility to 16 billion won.

This was part of a package worth 50 trillion won to support credit markets. It focused on buying commercial papers and other debts issued by financial institutions.

The BOK announced Thursday that it would relax collateral policies for local financial institutions seeking loans from the bank.

To ensure smooth functioning of the financial markets, the bank will also offer a temporary repurchase facility of approximately 6 trillion won ($4.24billion).

These measures are taken as the yield of 91-day commercial papers rose to a new 13-year high of 4.555% on Thursday, from 1.55% at the beginning of the year. The default news has not had an impact on the benchmark share index of the country.

The park opened in May.

Even corporate bond sales of AAA-rated state-run Korea Electric Power Corp. (NYSE:) Corp. were not enough to attract enough bidders Tuesday, after being caught off guard by the default.

“The Legoland issue has really triggered worries about a credit crunch and more are also worried about financial conditions at some brokerages and construction firms,” said Han Kwang-yeol, an analyst at NH Investment & Securities.

“The recovery will be slow because central banks around world are still increasing rates to curb inflation.”

Gangwon Province, which is required to repay the loan as a state guarantor of GJC’s debt, stated on Thursday that it will pay the entire 205 million won by Dec. 15.

“The decision (to repay debt) was coordinated with the government, including the Ministry of Economy and Finance,” stated Jeong Kwang-yeol deputy governor for economic affairs in Gangwon Province.

Lee Bokhyun, the governor for the Financial Supervisory Service, said separately that he expects market nerves and volatility to ease by next Wednesday.

“Today, we saw Gangwon Provice’s detailed debt repayment plans concerning Legoland.. After this weekend, market sentiment will improve,” Lee said to reporters in Incheon. Yonhap News reported.

($1 = 1,422.7300 won)

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