'Loss Compensation 100 Trillion Controversy' Without Funding Plan... Will Bank of Korea Mobilize Issuance Power?

The scale of deficit government bonds to be issued this year is equivalent to 93 trillion won

The Bank of Korea is on high alert over the possibility of bond issuance far exceeding expectations

"Legalizing government bond purchases is a shortcut to lowering national credit ratings," critics point out

Prime Minister Jeong Sye-kyun urges a slowdown, saying "It should not be done hastily"

[Asia Economy Reporters Kim Eun-byeol, Sejong=Son Seon-hee] The controversy over securing funding, a key issue surrounding compensation for losses to self-employed and small business owners due to the COVID-19 pandemic, shows no signs of subsiding. As a special bill demanding funding of up to 24.7 trillion won per month was proposed mainly by the ruling party, the so-called "100 trillion won controversy" emerged assuming that quarantine measures continue for four months. Prime Minister Jeong Sye-kyun called reports that the "100 trillion won card was pulled out" "malicious," but refrained from commenting on the specific funding scale.

The funding controversy was triggered by a bill announced by Min Byung-duk, a member of the Democratic Party of Korea. According to the National Assembly's legislative information system on the 25th, the special bill, which Min proposed as the main sponsor, aims to compensate up to 70% of loss sales for businesses subject to COVID-19 gathering bans, and 50-60% for other sectors. In this case, it is estimated that up to 24.7 trillion won per month will be required.

The problem is that how to secure the funding has not been clearly decided, but within the National Assembly, "the Bank of Korea's purchase of government bonds" has been mentioned. Simply put, the Bank of Korea would use its issuance power to inject money (by purchasing government bonds issued by the government) and use this money to support self-employed and small business owners. If COVID-19 resurges this year and gathering bans continue, an unlimited amount of money may be needed.

As talks of bond issuance exceeding expectations surfaced, the Bank of Korea is also on alert. The Bank is currently investigating through the National Assembly how the figure of "24.7 trillion won per month" was estimated. In the worst case, an additional 100 trillion won worth of government bonds may need to be issued over four months, and the Bank must understand the potential burden on the government bond market supply and demand to respond accordingly. Already, on the 22nd in the Seoul bond market, the final bid yield on 10-year government bonds was 1.758%, the highest in a year since January 20 last year (1.762%). As of 11:23 a.m. that day, it was trading at 1.773%.

Based on this year's main budget, South Korea's government bond issuance limit is 176.4 trillion won. If the loss compensation law proposed by Min is implemented, government bonds worth about 100 trillion won would need to be issued over four months. The government has already sharply increased the volume of government bonds during the COVID-19 response. Deficit bond issuance this year is expected to reach 93 trillion won, and additional issuance would exceed the issuance limit (176.4 trillion won).

The Bank of Korea's basic stance is to "respond if market volatility increases due to large-scale government bond issuance." This means that if interest rates rise (government bond prices fall) due to large-scale issuance, the Bank may purchase bonds depending on the situation. The Bank has maintained this stance since the early days of the COVID-19 crisis. In fact, last year, the Bank purchased about 8 trillion won worth of government bonds when bonds flooded the market during the COVID-19 response. The Bank's government bond holdings increased from about 16.7231 trillion won at the end of 2019 to 24.4832 trillion won as of the end of November last year. However, the Bank draws a line that government bond purchases should not become monetization of government spending that supports government expenditures. Bank of Korea Governor Lee Ju-yeol stated at the National Assembly's Planning and Finance Committee audit in October last year, "(Government bond purchases) are not monetization of government spending that supports government expenditures."

There is also a view that legalizing the Bank of Korea's government bond purchases is a shortcut to lowering the country's credit rating. While the Bank may purchase bonds depending on the situation if interest rates rise after bond issuance, announcing this to the market in advance could sow distrust in the financial market. Professor Cha Hyun-jin of the Bank of Korea Human Resources Development Institute criticized, "Legalizing the Bank of Korea's bond purchases by the National Assembly is an admission of lack of confidence and incompetence (even though the financial market can play a buffering role)." Additionally, concerns have been raised that if the Bank purchases more government bonds, the money supply will increase, causing inflation and exacerbating side effects such as asset price surges due to excessive money supply growth.

Meanwhile, Prime Minister Jeong recently urged "speed control," saying "It should not be done hastily" regarding the recent funding controversy. A Prime Minister's Office official said, "This is an issue that should be discussed during the legislative process in the National Assembly, but expanding the controversy based on the maximum estimated amount as a ceiling before discussions even begin is not appropriate," adding, "It is a matter that requires social consensus in line with existing provisions such as the Livestock Infectious Disease Control Act."

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