Hankyung Research Institute "Corporate Credit Risk Increasing Despite Financial Market Stability"

'Financial Market Trends and Implications Amid the COVID-19 Crisis' Report
Unusual Persistence of Corporate Credit Risk Expansion Despite Stock Price Recovery

[Asia Economy Reporter Dongwoo Lee] Despite the recent rise in stock prices, an unusual phenomenon of widening credit spreads continues to be observed. There are calls for government policy efforts to reduce credit spreads.

Credit spread refers to the interest rate difference between government bonds and corporate bonds. Typically, when a company's stock value rises, the company's credit risk decreases, leading to increased demand for corporate bonds and lower interest rates. However, due to the recent COVID-19 pandemic, demand for corporate bonds has decreased and interest rates have risen, causing credit spreads to widen. This means that companies are finding it increasingly difficult to borrow funds.

On the 30th, the Korea Economic Research Institute pointed out in its report titled 'Financial Market Trends and Implications Amid the COVID-19 Crisis' that while stock prices have shown a rapid recovery since their plunge in mid-March, credit spreads have continued to widen.

Currently, overseas markets such as the United States are experiencing a typical phenomenon where liquidity expansion by the government has spread not only to the stock market but also to the bond market, resulting in rising stock prices and narrowing credit spreads. In contrast, in South Korea, the report stated that the overwhelming proportion of government bond transactions means that the benefits of liquidity expansion are reflected only in the decline of government bond yields, while corporate bonds are experiencing rising interest rates due to lack of demand.

The report emphasized that the lack of visible reduction in credit spreads compared to the favorable stock market indicates that the main policy goal of quantitative easing?to lower long-term interest rates and promote corporate investment?is not being achieved. It explained that government policy efforts are necessary to promote corporate investment through the reduction of credit spreads.

Researcher Taegyu Lee of KERI said, "The government has already introduced bond market stabilization measures such as expanding the bond stabilization fund, but these have not yet fully taken effect in the market," adding, "it is desirable to reduce credit spreads to facilitate smooth corporate financing."

The report also noted that the longer the gap between the real economy and financial markets persists, the greater the risk burden on individual investors. It added that special caution is needed because individual investors in South Korea maintain strong net buying positions in the stock market and thus bear much more risk.

The report recommended that while liquidity expansion is inevitable during crisis periods, the side effects such as inefficient resource allocation and excessive risk-taking must be fully recognized, and efforts to improve the economic structure and regulatory reforms should be pursued simultaneously. It argued that by continuing necessary restructuring and regulatory reforms, the Korean economy can achieve solid growth amid the anticipated deglobalization trend following the COVID-19 crisis.

Researcher Lee said, "Short-term financial market stabilization policies are necessary during crises, but the widening gap between the real economy and financial markets should not be left unchecked in the long term," adding, "gradual liquidity reduction policies should be considered depending on the degree of economic improvement."

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