Frozen Financial Market, Will the 'Bond Market Stabilization Fund and Securities Market Stabilization Fund' Card Work?

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[Asia Economy Reporter Eunmo Koo] Opinions are divided on the policy effects following the government's announcement of plans to establish a large-scale Bond Market Stabilization Fund (Cha-an Fund) and Securities Market Stabilization Fund (Jeung-an Fund). While some expect these measures to improve domestic stock market investor sentiment and help support companies facing financial difficulties, there are also skeptical analyses regarding how effectively they can curb foreign selling pressure.

On the 19th, the government announced the results of the 1st Emergency Economic Meeting, stating that the financial sector will jointly invest to establish the Bond Market Stabilization Fund and Securities Market Stabilization Fund, which will be operated temporarily until the stock market recovers. The specific fund formation methods and scale will be announced at the 2nd Emergency Economic Meeting next week after discussions with bank presidents and association heads.

Regarding the establishment of the Cha-an Fund, the general response is that it is a meaningful measure. As the number of companies facing critical situations increases, there is a need at this point to support overcoming the crisis through liquidity supply. The Cha-an Fund was also established during the 2008 global financial crisis at a scale of 10 trillion won as a measure to address credit crunch and expand demand base in the bond market.

Hwang Sewoon, a research fellow at the Korea Capital Market Institute, advised, "The number of companies at risk of bankruptcy is increasing, and if these companies default, the paradigm of the crisis could completely shift. It is necessary to concentrate resources on liquidity supply mechanisms and credit enhancement devices that can prevent corporate bankruptcies, such as the Cha-an Fund." He added, "Since Korea's economic scale is much larger than in 2008, the fund should be established at a much larger scale than back then."

Experience from the past global financial crisis also raises expectations for the Cha-an Fund. Jang Hwatak, head of the DB Financial Investment Research Center, said, "During the past financial crisis, when risk-averse behavior caused the credit bond market and stock market to freeze, the Cha-an Fund had a positive impact on stabilizing the credit market and stock market. The Cha-an Fund is expected to contribute to stabilizing the market for high-grade bonds, which usually face concentrated selling pressure."

He pointed out that since the nature of the current crisis differs from the past, not only the scale of the Cha-an Fund but also its duration of operation may be extended. Lee Kyungrok, a researcher at Mirae Asset Daewoo, said, "This phenomenon is not a financial system problem but a health issue, so as long as the fear of COVID-19 exists, it will be difficult to resolve quickly despite interest rate cuts and liquidity supply by countries."

On the other hand, questions were raised about the effectiveness of the Jeung-an Fund. While the establishment of the fund itself is positive, its effects are inevitably limited. The Jeung-an Fund was introduced to prevent excessive stock market volatility from spreading to the real economy and economic sentiment amid recent consecutive stock price crashes. During the 2008 financial crisis, four related organizations, including the Korea Securities Dealers Association, established a 515 billion won "Stock Market Stabilization Fund."

The Jeung-an Fund is evaluated to have some role in slowing the pace of stock price declines by stabilizing investor sentiment immediately. Professor Seong Hee-hwal of Inha University Law School said, "The establishment of the Jeung-an Fund can provide psychological stability. It is expected to serve as a minimum safety net by preventing extreme crashes." Director Jang also said, "It can play roles such as controlling liquidity risk and easing supply-demand burdens across the financial market. Specifically in the stock market, it will influence the decisions of major investors such as institutions and foreigners, thereby having a dominant impact on stock index movements."

However, since the fundamental cause of the stock price decline does not lie within the domestic stock market, it is pointed out that the Jeung-an Fund is unlikely to be a measure that can stop the stock price fall. Kim Younghwan, a researcher at KB Securities, said, "The reason for foreign investors' selling is not because the outlook for the Korean stock market is particularly bad. The demand for cash due to global recession concerns is exerting strong downward pressure on stock prices, so the Jeung-an Fund can only play a role in moderating the speed of the decline." He added, "Since cash holdings have become critical for company survival, policy support that can reduce the possibility of credit crunch, such as credit guarantees, seems most important."

This content was produced with the assistance of AI translation services.