S.Korea’s central bank moves to avert credit crunch triggered by Legoland default

SEOUL -The Bank of Korea said on Thursday it will loosen collateral policies for local financial institutions applying for loans from the bank to mitigate the fallout from a debt default by the South Korean developer of theme park Legoland two hours east of Seoul.

Legoland Korea developer Gangwon Jungdo Development Corp. missed payments worth 205 billion won ($144 million) due on Sept. 29. That shocked financial markets given the debts, asset-backed commercial paper guaranteed by the local government, were rated A1 then and were invested by about 10 local brokerages.

The default has led to a sudden freezing of short-term money markets in Asia’s fourth largest economy just as the Bank of Korea’s 250 basis point worth of rate hikes since mid-last year are battering the country’s once-booming property market and local brokerages that are heavily exposed to real estate project finances.

Policymakers has been announcing liquidity-injecting measures one after another since Sunday, including doubling of a corporate bond-buying facility to 16 trillion won.

On Thursday, the BOK announced the move on collateral policies to mitigate the tightening of financial conditions in the short-term money markets.

The bank will also open a temporary repurchase agreement 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 surged to 13-year high of 4.54 percent on Thursday from 1.55 pecent at the start of the year.

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

“The Legoland issue has really triggered worries about a credit crunch and more are also worried about financial conditions at some brokerages and construction firms,” said Han Kwang-yeol, an analyst at NH Investment & Securities.

“The recovery of this credit market will be a slow one given that central banks all around the world are still hiking rates to curb inflation.”

To mitigate the market jitters, Gangwon Province, which is obligated to repay the loan as state guarantor of GJC’s debt, said on Thursday it will fully pay the entire 205 billion won by Dec. 15.

“The decision (to repay the debt) has been coordinated with the government including the Ministry of Economy and Finance,” said Jeong Kwang-yeol, deputy governor on economic affairs for Gangwon Province.

($1 = 1,422.7300 won)