South Korea expands corporate bond purchase program amid credit crunch concerns

South Korea's government will expand its corporate bond purchase program, among other liquidity supply measures, amid growing concerns about a credit crunch in bond and short-term money markets.

Economy and Finance Minister Choo Kyung-ho said on Sunday that the government will double the ceiling of the corporate bond-buying facility run by state-owned banks to 16 trillion won ($11 billion). The measure is aimed at easing volatility in the corporate bond and short-term money markets and concerns of a liquidity squeeze, Choo said after a meeting with top financial officials, including the central bank chief and the head of the regulator. Commercial paper issued by securities firms will be included in the facility's purchase list, while an additional 3 trillion won of liquidity will be provided by Korea Securities Finance Corp for securities firms facing liquidity shortages, he said. Governor Rhee Chang-yong told reporters that the Bank of Korea's monetary policy board will also consider its own measures, such as reactivating a special purpose vehicle to buy corporate bonds and commercial paper, which was first introduced during the pandemic. However, the premises for macroeconomic monetary policy have not changed as this problem is temporary and specific to the commercial paper market, he said. Concerns have been growing that there are signs of stress in South Korea's short-term money market as the central bank has raised its policy rate by 250 basis points from a record low of 0.5% since August last year to contain inflation. The official end-of-day yield on 91-day commercial paper rose to 4.25% on Friday from 1.55% at the start of the year, while the spread with the central bank's policy rate widened to 125 basis points from 48 basis points over the same period. On Thursday, the Financial Services Commission said it would delay by six months its plan to normalize banks' requirements to hold more liquid assets to help defuse the situation. In addition, South Korea's bond market stabilization fund will continue to buy 1.6 trillion won worth of corporate bonds and commercial paper from Monday. Follow Global Economic Developments on Social Media! Click here to follow Ieconomy official Facebook account! Click here to follow Ieconomy official Instagram account! Click here to follow Ieconomy official Twitter account!