By Yoo Choonsik
SEOUL, Feb 6 (Reuters) - South Korean authorities seem to have little choice left but to start pumping money more directly into the corporate bond market as borrowing costs remain near record highs despite the biggest ever round of rate cuts.
Cuts totalling 2.75 percentage points since October have flooded money markets with cheap cash, but deep pessimism about the outlook for Asia's fourth-biggest economy means most companies have to pay near-record rates to borrow.
Just this week, a state-run research group said the economy was now in recession and a regulatory official warned that foreign currency liquidity could tighten, both underlining the need for more urgent action.
Faced with the threat of a wave of bankruptcies of cash-starved companies, the authorities have two options, analysts say.
One is to keep on slashing official rates for months to come, maybe all the way down to zero from 2.5 percent now, hoping that at some point the economy will begin to respond and start turning around.
The other is to try to get the cash to companies in need as quickly as possible, probably by using public funds to buy corporate debt.
'The corporate bond market is not functioning properly and companies are still suffering from fund shortages. Authorities will soon need to directly purchase bonds to ease the crunch and avoid a series of bankruptcies,' said Hong Sun-young, a director at Samsung Economic Research Institute.
President Lee Myung-bak has called for efforts to bring down the borrowing costs for companies to avoid a repeat of massive corporate failures and a surge in job losses that followed the Asian financial crisis a decade ago.
The Bank of Korea, on its part, has promised emergency measures in case the financial system faces a severe crunch but has yet to say whether or when it will consider buying corporate bonds directly from the market.
But one can argue the crunch is already there. Companies rated BBB-minus -- the lowest investment grade -- have to pay nearly 9 cents more than the government on every dollar they borrow via bond sales, nearly triple the premium during 2007.
In contrast, short-term money markets are flush with cash after aggressive monetary easing with overnight borrowing costs between financial institutions below the central bank's 2.5 percent policy rate.
With private lenders bracing for South Korea's first recession since the Asian crisis a decade ago and paralysed by fear of a wave of bankruptcies that might follow, the authorities will have to step in, analysts say.
'The trouble in the corporate bond market will continue through the first quarter, maybe throughout the first half, and authorities may eventually have to buy bonds directly,' said Kim Jae-eun, an economist at Hana Daetoo Securities.
The Bank of Korea has already pledged 5 trillion won or half of a fund set up recently to buy corporate bonds from financial institutions.
But analysts say that is far too little to have a serious impact on the 300 trillion won corporate bond market and the central bank should either radically boost its contribution or set up a new, generously capitalised fund.
They suggest the central bank could buy corporate bonds through such a special fund or through financial institutions instead of buying them directly from issuers.
Still, the prospect of public money being used to bail out both healthy businesses that have merely hit a hard patch and those that have got in trouble of their own making, has stirred criticism from opposition and some analysts.
'I doubt whether we really need to lower (the corporate bond yields) by using taxpayers' money,' said Park Jong-kyu, an economist at the Korea Institute of Finance.
'Why do the taxpayers have to take responsibility even for apartments built in the wrong place, such as on a mountain?' he said, referring to the rapid business expansion by some companies during the recent property boom.
Bankruptcy statistics appear to play into the hands of sceptics. The number of defaulting companies hit a near four-year high of 345 in December but still represented just one-tenth of the number in early 1998.
Yet the prevailing view seems to be that the worst is ahead and a lack of action now may set off a dangerous spiral of economic contraction, triggering corporate failures that lead to layoffs, which would in turn deepen the slump yet more.
'Companies are announcing big losses. This means they are sacrificing profits instead of laying off their workers. But this can't continue,' said Oh Suk-tae, an economist at Citigroup. 'If the economic slump continues, companies will have no choice but to lay off their workers or fold business.'
(Editing by Jonathan Thatcher and Tomasz Janowski) Keywords: FINANCIAL/KOREA (choonsik.yoo@thomsonreuters.com; +82 2 3704 5580; Reuters Messaging: choonsik.yoo.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
SEOUL, Feb 6 (Reuters) - South Korean authorities seem to have little choice left but to start pumping money more directly into the corporate bond market as borrowing costs remain near record highs despite the biggest ever round of rate cuts.
Cuts totalling 2.75 percentage points since October have flooded money markets with cheap cash, but deep pessimism about the outlook for Asia's fourth-biggest economy means most companies have to pay near-record rates to borrow.
Just this week, a state-run research group said the economy was now in recession and a regulatory official warned that foreign currency liquidity could tighten, both underlining the need for more urgent action.
Faced with the threat of a wave of bankruptcies of cash-starved companies, the authorities have two options, analysts say.
One is to keep on slashing official rates for months to come, maybe all the way down to zero from 2.5 percent now, hoping that at some point the economy will begin to respond and start turning around.
The other is to try to get the cash to companies in need as quickly as possible, probably by using public funds to buy corporate debt.
'The corporate bond market is not functioning properly and companies are still suffering from fund shortages. Authorities will soon need to directly purchase bonds to ease the crunch and avoid a series of bankruptcies,' said Hong Sun-young, a director at Samsung Economic Research Institute.
President Lee Myung-bak has called for efforts to bring down the borrowing costs for companies to avoid a repeat of massive corporate failures and a surge in job losses that followed the Asian financial crisis a decade ago.
The Bank of Korea, on its part, has promised emergency measures in case the financial system faces a severe crunch but has yet to say whether or when it will consider buying corporate bonds directly from the market.
But one can argue the crunch is already there. Companies rated BBB-minus -- the lowest investment grade -- have to pay nearly 9 cents more than the government on every dollar they borrow via bond sales, nearly triple the premium during 2007.
In contrast, short-term money markets are flush with cash after aggressive monetary easing with overnight borrowing costs between financial institutions below the central bank's 2.5 percent policy rate.
With private lenders bracing for South Korea's first recession since the Asian crisis a decade ago and paralysed by fear of a wave of bankruptcies that might follow, the authorities will have to step in, analysts say.
'The trouble in the corporate bond market will continue through the first quarter, maybe throughout the first half, and authorities may eventually have to buy bonds directly,' said Kim Jae-eun, an economist at Hana Daetoo Securities.
The Bank of Korea has already pledged 5 trillion won or half of a fund set up recently to buy corporate bonds from financial institutions.
But analysts say that is far too little to have a serious impact on the 300 trillion won corporate bond market and the central bank should either radically boost its contribution or set up a new, generously capitalised fund.
They suggest the central bank could buy corporate bonds through such a special fund or through financial institutions instead of buying them directly from issuers.
Still, the prospect of public money being used to bail out both healthy businesses that have merely hit a hard patch and those that have got in trouble of their own making, has stirred criticism from opposition and some analysts.
'I doubt whether we really need to lower (the corporate bond yields) by using taxpayers' money,' said Park Jong-kyu, an economist at the Korea Institute of Finance.
'Why do the taxpayers have to take responsibility even for apartments built in the wrong place, such as on a mountain?' he said, referring to the rapid business expansion by some companies during the recent property boom.
Bankruptcy statistics appear to play into the hands of sceptics. The number of defaulting companies hit a near four-year high of 345 in December but still represented just one-tenth of the number in early 1998.
Yet the prevailing view seems to be that the worst is ahead and a lack of action now may set off a dangerous spiral of economic contraction, triggering corporate failures that lead to layoffs, which would in turn deepen the slump yet more.
'Companies are announcing big losses. This means they are sacrificing profits instead of laying off their workers. But this can't continue,' said Oh Suk-tae, an economist at Citigroup. 'If the economic slump continues, companies will have no choice but to lay off their workers or fold business.'
(Editing by Jonathan Thatcher and Tomasz Janowski) Keywords: FINANCIAL/KOREA (choonsik.yoo@thomsonreuters.com; +82 2 3704 5580; Reuters Messaging: choonsik.yoo.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.