Korea Likely to Extend Market Stabilization Steps as Risks Grow

South Korean financial regulators are likely to extend market stabilization measures they have taken since October to counter growing threats including a slump in real estate and the offshore crises of Silicon Valley Bank and Credit Suisse Group AG.

(Bloomberg) — South Korean financial regulators are likely to extend market stabilization measures they have taken since October to counter growing threats including a slump in real estate and the offshore crises of Silicon Valley Bank and Credit Suisse Group AG.

Korea was the first major country that faced a debt crisis after global central banks started raising interest rates to fight inflation. Authorities in Seoul pledged billions of dollars in support last year for financial markets after a default by the developer of Legoland Korea theme park, which was later repaid, triggered a meltdown in the nation’s credit market.

The steps authorities took to stabilize credit markets include increasing liquidity for real estate project-finance debt and extending easier rules for the liquidity-coverage ratio of banks. While expiration dates of the measures vary, some will end later this month. The Financial Services Commission said last week it will “decide and announce soon” whether to extend them.

While bond yields have tumbled recently and spreads on benchmark corporate notes have stabilized due in part to such policy steps, vulnerable sectors such as project-financing asset-backed securities or some lower-rated corporate bonds haven’t fully recovered. 

The spread between yields on corporate notes rated AAA and A- expanded to the most since 2009 last month, and has stayed elevated, according to data compiled by Bloomberg, meaning some lower-rated firms are still finding it challenging to raise funds from the bond market. There is also potential fallout from the collapse of SVB and the more recent financial stress at Credit Suisse which may also have repercussions in local markets.

‘Play Safe’

“Authorities will likely play safe because there is still some unease in markets” given the potential negative impact of higher interest rates, said Kim Eun-gie, a credit analyst at Samsung Securities Co. in Seoul. “It’s not easy to predict how the collapse of SVB will have repercussions at this point as well.”

While property markets around the world have weakened due to surging borrowing costs, Korea’s has been hit especially hard. In Seoul, which along with its environs accounts for nearly a quarter of the country’s economic output, prime residential property prices dropped 6.8% in the fourth quarter from three months earlier. That’s the most among 45 world cities, according to a Knight Frank report. 

A cool-down in real estate has pressured the project finance asset-backed commercial paper market and some lower-rated builders, as well as financiers related to troubled projects. Daewoo Engineering & Construction Co. recently paid 44 billion won ($34 million) to back out of a real estate project on the assumption its losses would be even bigger if it went ahead. 

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