South Korea pledges support to prevent contagion from a builder’s woes
SOUTH Korean officials pledged to step up a US$66 billion programme to stabilise markets if needed to limit the spillover from a builder’s debt troubles, with the central bank warning that real estate risks would probably increase next year.
The authorities “will make every effort to stabilise the financial market and immediately expand market stabilisation measures sufficiently as needed,” Finance Minister Choi Sang-mok said on Friday (Dec 29), before a meeting with the central bank governor and financial regulators.
The pledge came after a request by Taeyoung Engineering & Construction to reschedule its debt reignited concerns about the type of asset-backed security that triggered a credit crunch last year.
South Korea currently operates a US$66 billion suite of market stabilisation measures – including a bond market fund, corporate bond purchase programme and guarantees for property-related financing.
These were installed last year, when a default of an amusement park developer led to a run-up in short-term borrowing costs.
“Taeyoung’s debt-rescheduling application is obviously not positive for the financing conditions of construction companies,” said Han Sung Choi, corporate rating team manager at Korea Ratings. “There are concerns that others can also apply for similar steps.”
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The magnitude of South Korea’s property-related loans has been a key concern for the economy amid rising interest rates and a sluggish real estate market.
Market watchers worry that debt troubles may spread to other builders, in turn pressuring lenders and squeezing liquidity conditions.
The Financial Supervisory Service held a meeting with banks on Friday, asking them to support Taeyoung E&C’s contractors and partners.
The Bank of Korea said risks related to real estate project financing are likely to increase next year, although the country’s financial system will generally remain stable.
“There is a possibility of liquidity and credit risks related to real estate project financing materialising,” the central bank said on Friday in its 2024 monetary policy report, adding that financial institutions’ high capital ratio will help keep the broader system stable.
Credit market reaction has been limited so far. Taeyoung E&C’s shares have plunged 37 per cent this month. Local financial markets are closed on Friday. BLOOMBERG
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