[Breaking News] New Deal Fund Undermining Fairness

[Image source=Yonhap News]

New Deal Fund to Support the New Deal Policy

Controversy Over Principal Guarantee Using Public Taxes

[Asia Economy Reporter Ko Hyung-kwang] Earlier this month, a staggering 59 trillion won was poured into the subscription for Kakao Games' IPO. This amount is twice the subscription deposit of 31 trillion won for SK Biopharm in June, which caused a 'subscription frenzy,' and 1.5 times the entire budget of Seoul City this year (40 trillion won). This is the result of idle funds, lost in the era of ultra-low interest rates, rushing in all at once.

Idle funds in the market amount to 1,200 trillion won. The problem is that the amount borrowed for investment is rapidly increasing. According to the 'Financial Market Trends' announced by the Bank of Korea the day before, credit loans increased by as much as 5.7 trillion won in August alone. This is the largest monthly increase ever recorded. Slang terms such as 'Young-kkeul' (pulling together all one's resources) and 'Debt Investment' are no longer unfamiliar. Due to the impact of COVID-19, the government is in a situation where it must be more aggressive in injecting money, making it difficult to tighten loans. It is urgent to create a virtuous cycle where market funds flow into productive sectors such as private investment to lead economic recovery.

At this timely moment, the government announced financial measures to support the Korean New Deal policy earlier this month. Among them is the plan to create a 'New Deal Fund' worth 20 trillion won over the next five years, with investments from the government, financial sector, and the public. The idea is to secure funding for New Deal projects while giving all citizens the opportunity to participate and share in the outcomes. President Moon Jae-in personally emphasized, "We will open the future of the Korean economy with the New Deal Fund and policy finance." The New Deal Fund is positive in that it encourages some of the idle funds in the market to be invested in productive sectors. If successfully implemented, it is expected to have a twofold effect.

However, alongside expectations, there are many concerns. The issue of 'using taxpayers' money' has immediately surfaced. The New Deal Fund is designed so that the government and policy finance institutions invest 7 trillion won as subordinated capital out of the total 20 trillion won, bearing losses up to 35%. Financial Services Commission Chairman Eun Sung-soo explained, "It effectively guarantees the principal." This means that if losses occur, the government budget, i.e., taxes, will guarantee the principal. Current Capital Market Act prohibits loss compensation for investment products such as funds.

Criticism such as "Does it make sense to guarantee the principal with taxes?" and "The financial authorities that are supposed to monitor mis-selling are encouraging it" arose, and the government immediately changed its stance the next day, saying, "The government's priority burden ratio will basically be around 10%" and that additional risks will be transferred to policy finance institutions. However, since policy finance institutions are also operated under the government and with taxpayers' money, this explanation is nothing more than a superficial excuse.

In the past, government-controlled funds such as the Green Fund and the Unification Fund did not bear the burden of fiscal losses at least. This is why criticism has arisen that the New Deal Fund goes beyond a 'government-controlled fund' to become a 'taxpayer-funded fund.' Foreign investment banks have even warned about the side effects of the New Deal Fund. On the 7th, Hong Kong-based securities firm CLSA released a sarcastic report titled "President Moon Jae-in's Fund Manager Debut," criticizing the government's plan to establish the New Deal Fund, saying, "How can you compete with a fund that compensates losses with taxes? Fund managers, beware." It also stated, "The government is trying to gain votes by providing profits to New Deal Fund investors," and "The government is encouraging moral hazard." This is an unusual report from a foreign financial firm trying to avoid friction with foreign governments. It shows how unreasonable the New Deal Fund is as a product.

President Moon emphasized the importance of fairness in his New Year's address earlier this year, saying, "'Fairness' is like the air surrounding our economy and society; innovation and inclusion can only exist if fairness is the foundation, allowing our economy and society to breathe." How many investors will truly consider the New Deal Fund, which guarantees losses with taxes even against the Capital Market Act, as fair? According to President Moon, the financial sector, whose foundation of fairness is undermined by the New Deal Fund, will not only be unable to expect innovation and inclusion but the entire financial society will be in a state where it cannot even breathe.

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