Choo Kyung-ho "Liquidity Expansion of 50 Trillion + α"... Lee Chang-yong "Discussion on SPV Reactivation if Necessary" (Summary)

Government and Bank of Korea Hold Emergency Macroeconomic and Financial Meeting
Discuss Countermeasures for Funding Market Tightening Triggered by Legoland
Choo Kyung-ho: "Liquidity Supply Program '50 Trillion +α'"
Lee Chang-yong: "SPV Reactivation to Be Discussed by Monetary Policy Board if Necessary"
Regarding Monetary Policy, "Preconditions Remain Unchanged"

Deputy Prime Minister for Economy Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong are attending the 'Emergency Macroeconomic and Financial Meeting' held on the 23rd at the Bankers' Hall in Jung-gu, Seoul, and are talking before the meeting begins. Photo by Yoon Dong-joo doso7@

As concerns over a liquidity crisis grew due to the default of asset-backed commercial paper (ABCP) related to Legoland in Gangwon Province, the government and the Bank of Korea took measures to respond. The government activated a liquidity supply program exceeding 50 trillion won, and the Bank of Korea decided to discuss at the Monetary Policy Committee the inclusion of bank bonds and public institution bonds, in addition to government bonds, as eligible collateral securities.

On the 23rd, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, Bank of Korea Governor Lee Chang-yong, Financial Services Commission Chairman Kim Ju-hyun, Financial Supervisory Service Governor Lee Bok-hyun, and Presidential Office Economic Secretary Choi Sang-mok held an emergency macroeconomic and financial meeting at the Seoul Banking Hall to discuss market stabilization measures. They met again after about a month as concerns over tightening in the funding market increased due to the recent Legoland default incident.

Choo Kyung-ho: "Liquidity Supply Program Expanded to '50 Trillion + α'"

Deputy Prime Minister Choo stated, "To prevent the spread of anxiety in the corporate bond market and short-term financial markets and to avoid liquidity contraction, we will expand and operate the existing market stabilization measures with a liquidity supply program of 50 trillion won plus alpha."

The liquidity supply programs operated by the government include the Bond Market Stabilization Fund (Chaean Fund) of 20 trillion won, a corporate bond and commercial paper (CP) purchase program of 16 trillion won, liquidity support of 3 trillion won for securities firms facing shortages, and 10 trillion won in guarantee support for businesses by the Housing and Urban Guarantee Corporation (HUG) and Korea Housing Finance Corporation.

The government decided to resume purchases of corporate bonds and commercial papers (CP), including construction company-guaranteed project financing (PF) and asset-backed commercial paper (ABCP), starting from the 24th by first utilizing 1.6 trillion won of available resources from the 20 trillion won Chaean Fund.

Additionally, the process for additional capital calls will be accelerated to enable full execution from early next month, with plans to raise more funds if necessary.

Deputy Prime Minister Choo said, "We will double the purchase limit of the corporate bond and CP purchase program operated by the Korea Development Bank, Industrial Bank of Korea, and Korea Credit Guarantee Fund from the existing 8 trillion won to 16 trillion won, and by including CPs issued by securities firms and other financial companies as purchase targets, we will stabilize market anxiety related to real estate PF-ABCP."

For securities firms temporarily facing liquidity shortages due to difficulties in refinancing PF-ABCP, Korea Securities Finance Corporation will first utilize its own resources to provide liquidity support of about 3 trillion won.

Chairman Kim Ju-hyun said on the day, "There are several factors behind the recent bond market instability, but we understand that the main cause is the sudden rise in interest rates," and emphasized, "We will engage in closer dialogue with the market and actively respond to the difficulties faced by the private sector."

He added, "We will do everything possible without being bound by existing principles or methods. If necessary, we will further extend the Liquidity Coverage Ratio (LCR) exemption and, through dialogue with the market, take necessary actions regarding loan-to-deposit ratio regulations."

Bank of Korea Governor Lee Chang-yong and Chief Economic Secretary Choi Sang-mok are attending the 'Emergency Macroeconomic and Financial Meeting' held on the 23rd at the Bankers' Hall in Jung-gu, Seoul, removing their masks to answer questions from the press. Photo by Yoon Dong-joo doso7@

Lee Chang-yong: "Discussion on SPV Reactivation and Others at Monetary Policy Committee if Needed"

Governor Lee Chang-yong said that to support liquidity in the tightened funding market, the Monetary Policy Committee meeting scheduled for the 27th will review the inclusion of public institution bonds and bank bonds as eligible collateral securities for loans.

Currently, banks provide only government bonds, monetary stabilization bonds, and government-guaranteed bonds (government bonds) as collateral (eligible collateral securities) when borrowing from the Bank of Korea. If bank bonds are included as eligible collateral securities, banks can use the bank bonds they already hold as loan collateral, thereby easing funding pressures.

When asked whether including public institution bonds and bank bonds as eligible collateral securities would contribute to market stabilization, Governor Lee replied, "The effects of expanding eligible collateral securities will be discussed in detail at this week's Monetary Policy Committee meeting. It is not appropriate to comment here."

Governor Lee showed caution regarding the reactivation of the Special Purpose Vehicle (SPV) or the Financial Stability Special Loan. He said, "Other measures such as the SPV were excluded from this plan, but we will comprehensively review the impact of this plan on the market and the volatility of international financial markets, and if deemed necessary, we can discuss them again at the Monetary Policy Committee."

The Financial Stability Special Loan system requested by securities firms to the Bank of Korea involves the Bank of Korea lending against high-quality corporate bonds (AA- or higher) collateralized by general companies or financial companies such as securities firms, insurance companies, and banks, which can resolve liquidity shortages in emergencies.

Regarding the monetary policy stance, he explained that despite the recent funding market tightening, the underlying assumptions have not changed. He said, "The market measures announced today are micro-level actions addressing the heightened credit concerns centered on the asset-backed commercial paper (ABCP) market. I do not think they contradict or change the assumptions of the macro-level monetary policy operation."

It can be interpreted that while measures to ease funding and credit tightening in the corporate bond and CP markets will continue, the monetary policy stance focused on interest rate hikes to reduce inflationary pressures will be maintained.

Deputy Prime Minister for Economy Choo Kyung-ho attended the 'Emergency Macroeconomic and Financial Meeting' held at the Bankers' Hall in Jung-gu, Seoul on the 23rd, and is briefing the meeting results after the meeting./Photo by Yoon Dong-ju doso7@/Photo by Yoon Dong-ju doso7@

Choo Kyung-ho: "Local Governments Will Faithfully Fulfill Guarantees on ABCP"

Deputy Prime Minister Choo emphasized, "We will actively respond to the instability in real estate PF," and added, "Regarding ABCP guaranteed by local governments, all local governments reaffirm their commitment to faithfully fulfill their payment guarantee obligations."

This statement is analyzed as an effort to alleviate the liquidity market tightening crisis caused by Gangwon Province, the main entity of the Legoland project, refusing to fulfill guarantees on ABCP.

Previously, Gangwon Jungdo Development Corporation (GJC), a subsidiary of Gangwon Province, established a special purpose company (SPC) named Iwon Jeilcha in 2020 to raise construction funds for Legoland and issued ABCP worth 205 billion won, but it defaulted this month. The default of ABCP, which was considered relatively safe due to local government guarantees, caused a sharp rise in corporate bond and commercial paper (CP) interest rates, rapidly cooling the overall funding market.

When the bond market freezes, prices fall and interest rates rise, making it increasingly burdensome for companies to issue corporate bonds. Additionally, the credit spread?the difference between corporate bond and government bond yields?has doubled compared to early this year, further increasing borrowing costs for general companies.

The government also emphasized strong measures against acts that cause market instability. Deputy Prime Minister Choo said, "We will closely communicate with market participants such as financial institutions to promptly identify market trends and difficulties and respond accordingly," and added, "We will actively respond to market-disrupting acts and the spread of malicious rumors or false information that cause market instability."

Governor Lee Bok-hyun also commented, "The Financial Supervisory Service is carefully monitoring various information related to the soundness and liquidity of financial institutions," and said, "Based on this awareness and information, we believe some issues strongly reflect market-disrupting characteristics involving the spread of false information."

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