The Bank of Korea decided on March 26 to supply unlimited liquidity by purchasing repurchase agreements on a weekly basis. In addition, the central bank is considering purchasing corporate bonds on condition of government guarantee. The unprecedented measures are because the economic impact of COVID-19 can be incomparable.
What is worrisome is that the unlimited liquidity supply can result in more credit risks. Still, the Bank of Korea explained that it would purchase securities equivalent to the sovereign credit rating, triple-A bonds and government and public institutions bonds and, as such, credit risks can be kept to the minimum.
The Bank of Korea is going to come up with additional measures if the unlimited liquidity supply does not lead to financial market stabilization. The measures are said to include more direct liquidity supply in the form of direct purchase of debentures, commercial papers and loans of for-profit corporate bodies.
Even so, the additional measures are less likely to be realized. Four years ago, the necessity of debenture purchase by the central bank was mentioned during the restructuring of the shipbuilding and maritime industries, and yet the purchase did not occur due to legal problems and so on. “Government guarantee for corporate bonds requires the consent of the National Assembly and it remains to be seen whether the public will consent to it,” the bank explained.