[Exclusive] Preemptive Response to Widening Middle East Instability: Korea Credit Guarantee Fund Expands P-CBO Support to 3 Trillion Won

PF-ABCP Purchases Planned
If Short-Term Money Market Instability Worsens


Over 400 Companies Request Assistance
Amid Ongoing Tensions in the Middle East

As concerns about instability in the financial markets grow amid escalating tensions in the Middle East, the government has stepped in to defend the money market. Financial authorities have decided to increase the 2024 Primary Collateralized Bond Obligation (P-CBO) support provided by the Korea Credit Guarantee Fund from the original 2.8 trillion won to 3 trillion won. In the event of further market instability, authorities will also consider purchasing Project Financing Asset-Backed Commercial Paper (PF-ABCP). The aim is to preemptively prevent corporate funding strains from spreading to the real economy and undermining market sentiment before the Middle East–driven instability results in tangible damage.

According to the financial sector on March 26, the Korea Credit Guarantee Fund has expanded its P-CBO supply plan for this year in response to the possibility of prolonged instability in the Middle East and resultant money market concerns. The original annual support plan was set at 2.8 trillion won, but this will be increased to 3 trillion won to strengthen market stabilization efforts. The total amount and types of support will be flexibly managed according to developments in the Middle East.

The P-CBO program allows the Korea Credit Guarantee Fund to bundle corporate bonds from companies with low credit ratings—companies that would otherwise struggle to issue bonds on their own—and guarantee them, making it easier for these bonds to be digested by the market. This system offers a funding channel even for companies unable to directly issue bonds. During periods of market instability, it serves as a safety net by supporting the bond issuance of lower-rated companies, which are typically shut out before blue-chip firms, and thus helps prevent funding strains from turning into a full-blown crisis in the real economy. The decision to increase P-CBO support by 200 billion won reflects the authorities’ judgment that, should market instability drag on, the corporate bond issuance environment could rapidly deteriorate—especially for lower-rated issuers.

If short-term money market instability intensifies, authorities also plan to pursue the purchase of PF-ABCP. This measure is intended to swiftly ensure that corporate funding channels do not become blocked if Middle East–related variables extend beyond direct damage to trigger overall market pessimism. PF-ABCP refers to short-term commercial paper issued based on real estate project financing (PF) loan receivables. Since real estate development projects require long-term funding but PF-ABCP is structured as a short-term instrument with maturities of around one to three months, any disruption in refinancing could quickly weaken the liquidity of securities firms that provide credit enhancements. This makes PF-ABCP the most vulnerable link during periods of deteriorating market sentiment. For this reason, both the Korea Development Bank and the Korea Credit Guarantee Fund purchased PF-ABCP in 2022 during the Legoland crisis to help contain short-term money market strains.

On the ground, requests for assistance related to damage from the Middle East crisis are already accumulating. As of March 25, the Korea Development Bank has reported around 10 companies requesting necessary measures such as maturity extensions in response to mounting risks in the Middle East. The Industrial Bank of Korea is also receiving support requests from exporters suffering losses. Since March 3, the Korea Credit Guarantee Fund has provided guarantee support to about 400 companies over a period of two to three weeks. The Export-Import Bank of Korea explained that it is providing funding to companies indirectly affected by rising exchange rates, higher oil prices, and increased logistics costs. To address the growing risks in the Middle East, the government has established a total financial support program worth 20.3 trillion won, centered around policy financial institutions.

The damage is spreading among small and medium-sized enterprises (SMEs). According to the Ministry of SMEs and Startups, there have been 379 reported cases of damage and difficulties related to the Middle East crisis among SMEs, an increase of 117 from the previous week. By type, transportation disruptions accounted for 61.4%, contract cancellations or postponements made up 35.1%, and higher logistics costs followed at 34.3%.

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