Concerned About A Tightening Credit Market, South Korea Is Expanding Its Program To Acquire Corporate Bonds

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Last Updated on October 24, 2022 by Bitfinsider

Amidst mounting concerns about a credit crunch in bond and short-term money markets, the government of South Korea has decided to expand its corporate bond-buying program in addition to taking other measures to increase the supply of liquidity.

Choo Kyung-ho, the Minister of Economy and Finance, announced on Sunday that the government intends to quadruple the ceiling of its corporate bond-buying facility, which is managed by state-run banks, to 16 trillion won ($11 billion).

Following a meeting with other top financial authorities, including the governor of the central bank and the chief regulatory officer, Choo stated that the measure’s objective is to reduce the volatility of the corporate bond and short-term money markets as well as concerns regarding restricted liquidity.

The facility’s purchase list will include commercial paper that was issued by securities companies, and the Korea Securities Finance Corp. will provide an additional 3 trillion won in liquidity to securities companies that are experiencing liquidity shortages, he said. Commercial paper that was issued by securities companies will be included on the facility’s purchase list.

According to Governor Rhee Chang-statements yong’s to the press, the monetary policy board of the Bank of Korea will also consider its own measures, such as reactivating a special purpose vehicle to purchase corporate bonds and commercial paper, which was first introduced during the pandemic. In addition, the board will consider taking its own measures.

According to him, the premises of macroeconomic monetary policy have not changed in any way because this problem is just temporary and is specific to the commercial paper market.

As a result of the South Korean central bank raising its policy interest rate from a record-low 0.5% in August of last year to a new high of 250 basis points in December of that same year in an effort to contain inflation, there have been growing worries about signs of stress in South Korea’s short-term money market.

The official end-of-day yield on 91-day commercial paper increased to 4.25% on Friday, up from 1.55% at the beginning of the year. Concurrently, the spread over the policy rate at the central bank widened to 125 basis points, up from 48 basis points during the same time period.

The Financial Services Commission announced on Thursday that it would defer by six months a proposal to normalize requirements for banks to keep more liquid assets in an effort to help ease the tensions caused by the current circumstance.

Additionally, beginning on Monday, the South Korean bond market stability fund would begin purchasing corporate bonds and commercial paper with a total value of up to 1.6 trillion won.

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