Race to Respond in Bond Markets... US Clear in a Month vs. Korea in the Dark

Beaten by General Election and Slow Government Decisions
Lack of Consensus on Corporate Support Also a Cause

[Asia Economy Reporter Kim Eun-byeol] 'One Month' VS 'No Promise'

This highlights the speed difference between the United States and South Korea in responding to the corporate bond and commercial paper (CP) markets shaken by the novel coronavirus disease (COVID-19) crisis. In times of crisis, quick action is crucial when credit tightening occurs in financial markets. However, South Korea's response speed is noticeably slower compared to the U.S. Causes include political issues such as the general election, the government's slow judgment on the market, and a lack of consensus on corporate support.

According to the U.S. Federal Reserve (Fed) on the 23rd (local time), as of the 22nd, the Fed has purchased $2.732 billion (approximately 3.37 trillion KRW) worth of CP and asset-backed commercial paper (ABCP) through the New York Federal Reserve Bank. This was done via the special purpose vehicle (SPV) that can purchase CP, known as the Commercial Paper Funding Facility (CPFF).

The Fed first announced the plan to establish the CPFF and its subsidiary SPV on March 17. Within about a week, it obtained approval from the U.S. Treasury and Congress. It took one month until the first CP purchase on April 14. Corporate bond purchases are also progressing rapidly. The Fed proposed the Primary Market Corporate Credit Facility (PMCCF) on March 23 and received Treasury approval on April 9. In fact, the Fed reported to Congress at the end of last month before Treasury approval was finalized. The key was that Congress passed the COVID-19 emergency relief law including government-guaranteed funds for financial market responses. Since the congressional decision was confirmed, the Treasury could easily provide guarantees.

South Korea's situation contrasts sharply. Although the market has been volatile since March, no one proposed purchasing corporate bonds or CP through an SPV. Bank of Korea Governor Lee Ju-yeol only began discussing direct corporate bond purchases on April 9. However, it was only after another week and then another week, just before the general election, that the government announced it would purchase corporate bonds with 20 trillion KRW. Even then, it is unclear how the funds will be raised. The government guarantee plan and parliamentary approval for the guarantee are still uncertain with no set timeline.

A financial market official said, "It is difficult to simply compare because the market size and funding limits differ between the U.S. and Korea," but added, "It is regrettable to see no one willing to take responsibility." He continued, "Although the market has stabilized compared to March, the U.S. had this system in place during the 2008 financial crisis," and argued, "We should take this opportunity for the government, National Assembly, and Bank of Korea to unite and prepare a swift response."

[Image source=Yonhap News]

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