S.Korea Moves Again to Ease Credit Crunch Triggered by Developer Legoland’s Default

SEOUL (Reuters) – South Korea’s central bank on Thursday announced new measures to improve liquidity in the banking system and ease the fallout from a developer default that has raised fears of a credit crunch in Korea’s fourth-largest economy. Asia.

Gangwon Jungdo Development Corp., the developer of the new Legoland Korea theme park two hours east of Seoul, missed bond payments worth 205 billion won ($144 million) due on 29 september.

The news shocked some investors given that the debts, asset-backed commercial paper backed by the local government, were then rated A1. A dozen local brokerage houses are among the creditors.

The default has led to a sudden freeze in short-term money markets in the country, just as the Bank of Korea’s 250 basis point rate hikes since the middle of last year hit the once-damaged property market. booming. Local brokers are also heavily exposed to the financing of real estate projects.

Growing signs that Korean companies are struggling to secure funding come amid global financial market volatility and a slump in China’s property market, something the BOK will need to take into account as analysts s expect policy rates to rise further to 3.50% or 3.75% by next year.

Data released earlier on Thursday showed South Korea’s economic growth fell to its lowest level in a year in the third quarter.

Policymakers announced a series of measures since Sunday to inject more money into the financial system, including doubling a corporate bond purchase facility to 16 trillion won.

It was part of a 50 trillion won package to support credit markets, which focused on buying commercial paper and other debt issued by financial institutions.

On Thursday, the BOK announced that it would relax guarantee policies for local financial institutions seeking loans from the bank.

The bank will also open a temporary repurchase facility worth about 6 trillion won ($4.24 billion) for local financial institutions to support the smooth functioning of financial markets.

The measures come as the yield on 91-day commercial paper jumped to 4.55% on Thursday, its highest level in 13 years, from 1.55% at the start of the year. The country’s benchmark stock index was little taken aback by the default news.

The theme park opened in May.

Caught off guard by the default, even corporate bond sales by AAA-rated state-owned Korea Electric Power Corp. failed to get enough bidders on Tuesday.

“The Legoland issue has really raised concerns about a credit crunch and others are also worried about the financial conditions of some brokerages and construction companies,” said Han Kwang-yeol, an analyst at NH Investment & Securities. .

“The recovery in this credit market will be slow as central banks around the world continue to raise rates to rein in inflation.”

To ease market jitters, Gangwon Province, which is required to repay the loan as GJC’s public debt guarantor, said Thursday it would pay the full 205 billion won in full by May 15. december.

“The decision (to repay the debt) was coordinated with the government, including the Ministry of Economy and Finance,” said Jeong Kwang-yeol, vice governor for economic affairs of Gangwon province.

Lee Bok-hyun, the governor of the Financial Supervisory Service, said separately that he expects market nerves to subside by next week.

“Today we saw Gangwon Province’s detailed debt repayment plans for Legoland. After the weekend, market sentiment will improve,” Lee told reporters in Incheon, Yonhap reported. News.

(Reporting by Cynthia Kim; Editing by Christian Schmollinger, Ana Nicolaci da Costa and Kim Coghill)

Copyright 2022 Thomson Reuters.

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