Lee Ju-yeol Opposed Direct Purchase of Government Bonds... US and EU Completely Ban It by Law

Won Value Decline → South Korea's External Credibility Decline → Concerns Over Foreign Investment Capital Outflow Side Effects
"US, Europe, China Prohibit Direct Purchase of Government Bonds by Law"

[Asia Economy Reporter Jang Sehee] The ruling party, the Democratic Party of Korea, has ordered the Bank of Korea to directly purchase government bonds to prevent fiscal deterioration, signaling a full-scale pressure campaign ahead. Previously, Min Byung-duk, a Democratic Party lawmaker, proposed the "Special Act on Loss Compensation and Coexistence to Overcome Coronavirus Infectious Disease," which mandates the government to issue 24 trillion won in government bonds monthly and the Bank of Korea to directly purchase them to secure funding for the self-employed loss compensation system. The Bank of Korea has strongly opposed this, citing concerns over discrepancies with the bond secondary market, a decline in external creditworthiness, and potential damage to national credit. It has especially emphasized that major countries prohibit direct purchases by law, actively spreading overseas cases.

The biggest reason the Bank of Korea opposes direct purchases of government bonds is that bypassing the secondary market makes it impossible to grasp supply and demand flows. Currently, the Bank of Korea purchases some government bonds available in the secondary market to regulate supply and demand. However, if it directly purchases bonds, it would be obliged to buy government-issued bonds at any price rather than at an appropriate price based on market conditions. This could lead to "monetization of debt." Monetization of debt means that national debt becomes a source of government funds, representing an extreme form of monetary policy. On the 23rd, Governor Lee Ju-yeol appeared before the National Assembly and expressed concerns, stating, "It raises controversy over monetization of government debt, causing worries about fiscal soundness, damaging the central bank's credibility, and negatively affecting external credit ratings." The strong demand for direct purchases in the National Assembly stems from the absence of a prohibition clause on direct purchases in current law. According to the Bank of Korea Act, the Bank of Korea may provide overdraft loans or other forms of credit to the government and is authorized to directly acquire government bonds. However, the Bank of Korea has never implemented direct purchases since 1995.

◆ US and EU also ban ‘direct purchase of government bonds’ by law = The Bank of Korea cites overseas cases where direct purchases are legally prohibited. Governor Lee also stated, "In major countries, central banks are legally prohibited from directly purchasing government bonds." In the United States, under the Federal Reserve Act, U.S. government bonds or medium- to long-term bonds fully guaranteed by the U.S. government, as well as other debt instruments, regardless of maturity, can only be traded in the open market. In Europe, the European Central Bank (ECB) and central banks of European Union (EU) member states are prohibited from acquiring government bonds or lending to governments. Even China, a developing country, is prohibited from lending to government finances and from directly subscribing to or acquiring government bonds or other government debt securities.

◆ Decline in external creditworthiness... Review of related law amendments = Experts criticize the ruling party's pressure. Professor Lee In-ho of Seoul National University’s Department of Economics said, "It is like turning debt that must be repaid in the future into liquidity," adding, "If direct purchases are made through the issuance market, it is difficult to assess how much private demand exists, and the market control function disappears." The opposition party is considering amendments to related laws. Choo Kyung-ho, a member of the National Assembly’s Planning and Finance Committee from the People Power Party, stated, "Direct purchase of government bonds clearly has side effects such as a decline in external creditworthiness and must never be mobilized for reasons like loss compensation systems," adding, "It is necessary to consider supplementing the legal provisions."

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