With South Korea’s export-dependent economy staggering amid the novel coronavirus pandemic and companies finding sources of credit drying up, Seoul is mulling new formats for liquidity injections.
The Bank of Korea will supply liquidity to financial institutions through repurchase agreements, but some argue that this is insufficient as the BOK, unlike the US Federal Reserve, is not directly buying corporate papers or bonds.
The BOK’s announced measures are designed to help ease the squeeze facing some securities houses and provide ammunition to financial institutions so they can prop up companies. Five large securities houses are included in the repurchase agreement contract.
On Thursday, in its Monetary Policy Board meeting, the BOK kept its policy rate frozen at 0.75%, following its March cut to the current record low. But it also decided to include special bonds issued by state-run banks as bonds they can purchase, along with government bonds and securitized bonds.
It is the first time the central bank has decided to buy such bonds since the 2008 global financial crisis.
Another possible policy option, expected to be implemented in the near future, is BOK loans to non-banking financial institutions.
“Along with the government, working-level officials are preparing a system to provide loans to securities firms with blue-chip corporate bonds as collateral,” BOK Governor Lee Ju-yeol said in a press conference Thursday.
In a strong message to the market, Financial Services Commission Chairman Eun Sung-soo said: “The government has a firm determination to prevent the collapse of companies over a temporary credit crunch.”
However, as none of the announced measures directly fund the corporate sector, some have urged the BOK to buy up corporate bonds to underpin the financial conditions of Korean companies.
Stepping over boundaries
A top-level official Korean financial official suggested to Asia Times that Korea’s corporate and financial systems have a breathing space for now, but he anticipates major problems around the end of the second quarter.
Under government auspices, a bond-market stabilization fund worth 10 trillion won ($8.2 billion) has been established, but the source warned that far more will be needed in the months ahead.
“It is not big enough,” the source said. “I hope the BOK buys corporate bonds.”
Under current law, the central bank is not permitted to buy corporate bonds. It can only purchase government bonds and bonds with payment guarantees.
However, a source with knowledge of the matter told Asia Times: “The BOK is willing to do more if more liquidity supply is necessary because we are in an emergency now. The BOK may provide loans to institutions – for example, special purpose companies – to buy corporate bonds.”
That is a strong hint that the BOK may follow the lead of the US Federal Reserve.
The Fed announced the creation of SPCs to buy corporate bonds and CPs last month. It plans to provide loans to these SPCs, which include Commercial Paper Funding Facilities (CPFF), Primary Market Corporate Credit Facilities (PMCCF) and Secondary Market Corporate Credit Facilities.
According to sources, if this measure is taken in Korea, financial institutions are likely to participate in forming the SPCs, and the BOK will provide loans to these SPCs.
However, a compensation system for any loss suffered by the SPCs would be required. Asia Times understands that this ticklish issue will be discussed only if and when the decision is made to establish the SPCs.
Meanwhile, the pressure mounts.
Last month, the state-run Korea Development Bank provided one trillion won in an emergency loan to power plant builder Doosan Heavy Industries and Construction, which was suffering from a credit crunch.
“In a normal situation, they could issue bonds for their debt payments,” a senior industry official told Asia Times. “But, all of a sudden, the coronavirus brought about credit squeeze.”
Other Korean companies, notably airlines and automaker Ssangyong, are also in dire straits.
The 10 trillion won market stabilization fund will start buying bonds this week. However, it does not purchase CPs and corporate bonds with low credit ratings.
What about junk bonds?
Seoul plans to ease the credit crunch of companies with low credit ratings through other policy tools such as issuing Primary CBOs (Collateralized Bond Obligations) and the Korea Development Bank’s quick purchase of corporate bonds issued for debt payment, according to Korea’s chief financial regulator.
P-CBOs are asset-backed securities with reinforced credit ratings. Underlying assets are low-rated bonds.
Financial Services Commission Chairman Eun added: “If the BOK establishes a lending facility to non-banking financial institutions such as securities houses, we will let the bond market stabilization fund buy low-rated bonds.”