Short-term Fund Market Freezing
The bond market is contracting rapidly with another global economic recession around the corner and South Korean companies losing trust. It is pointed out that securities companies are exacerbating problems in the short-term fund market by selling a large amount of short-term bonds to respond to ELS margin calls.
According to industry sources, commercial papers, electronic short-term bonds and short-term asset-backed securities maturing within three months add up to 168,827.8 billion won as of March 20 and those maturing within one year total 281,141.6 billion won. Specifically, those maturing within three months are divided into 72,861.6 billion won of asset-backed commercial papers and short-term bonds and 95,966.2 billion won of commercial papers and electronic short-term bonds. When debentures are included in the calculation, more than 300 trillion won are subject to refunding or redemption within one year.
Experts point out that those short-term asset-backed securities and commercial papers can pose a significant threat to the capital market as those are larger in size and shorter in maturity than debentures. Some commercial papers have maturity of just one month.
The financial authorities and investment companies are staying alert with the short-term fund market showing signs of stagnation. Since asset-backed securities are based on credits provided by securities companies and banks, any refunding problem can turn into a financial risk. In this regard, the Financial Services Commission held an emergency meeting with the CEOs of six securities companies on March 20 and requested measures related to commercial papers and asset-backed securities.
In addition, refunding of asset-backed securities with a maturity of at least one year can pose another problem with the outstanding amount at approximately 27 trillion won. Most recently issued asset-backed securities are subject to early redemption in the event of a lowered credit rating. Although the South Korean government is going to introduce a bond market stabilization fund for financial stability improvement, it is pointed out that the fund is not sufficient to stabilize the short-term fund market as the financing process will take at least one month.