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South Korea Broadens Its Corporate Bond-Buying Initiative In Response To Credit-Crisis Fears

South Korea Broadens Its Corporate Bond-Buying Initiative In Response To Credit-Crisis Fears
With growing concerns in bond and short-term money markets about a credit crunch, South Korea's government has decided to broaden its corporate bond-buying program, along with taking up other liquidity-supply measures.
Choo Kyung-ho, Minister of Economy and Finance, announced on Sunday that the government will double the ceiling on its corporate bond-buying facility run by state-owned banks to 16 trillion won ($11 billion).
Choo stated after a meeting with top financial officials, including the central bank governor and regulatory chief, that the measure is aimed at reducing volatility and concerns about tight liquidity in corporate bond and short-term money markets.
Commercial paper issued by securities firms will be included on the facility's purchase list, and the Korea Securities Finance Corp will supply an additional 3 trillion won of liquidity to securities firms experiencing liquidity shortages, he said.
The Bank of Korea's monetary policy board will also consider its own measures, such as reactivating a special purpose vehicle established during the pandemic to purchase corporate bonds and commercial paper, Governor Rhee Chang-yong told reporters.
However, he stated that the premises of macroeconomic monetary policy remain unchanged because this issue is temporary and specific to the commercial paper market.
Concerns have grown about signs of stress in South Korea's short-term money market, despite the central bank raising its policy interest rate by 250 basis points from a record-low 0.5 per cent in August last year to combat inflation.
The official end-of-day yield on 91-day commercial paper increased to 4.25 per cent on Friday, up from 1.55 per cent at the start of the year, with the spread over the central bank's policy rate increasing to 125 basis points, up from 48 basis points.
To help calm the situation, the Financial Services Commission announced on Thursday that a plan to normalize requirements for banks to hold more liquid assets would be delayed by six months.
In addition, starting Monday, South Korea's bond market stabilisation fund will resume purchasing corporate bonds and commercial paper worth up to 1.6 trillion won.

Christopher J. Mitchell

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