S.Korea central bank to help ease crunch with new funds
Reuters - 2 hours 16 minutes ago
By Seo Eun-kyung
SEOUL, Nov 24 - South Korea's central bank said on Monday it would provide as much as half of a proposed 10 trillion won fund to help ease a credit crunch plaguing the country's markets, adding it would print new money to do so.
The Bank of Korea, which made the announcement after an emergency meeting, said the fund should bring money market rates down and also pledged to supply more liquidity in a timely manner to help stabilise financial markets.
"We will support the fund as much as possible so that it can function well. With the fund available for troubled companies, we expect the rates will go down," Lee Ju-yeol, the central bank deputy governor, told reporters.
"The Bank of Korea will print the new money to finance its contribution to the fund," Lee said.
The government plans to set up the fund to buy bonds from companies and banks struggling to raise money as Asia's fourth largest economy grapples with a credit crunch brought on by the global economic downturn.
Financial markets showed muted reaction to the widely expected decision, with December Treasury bond futures down five ticks to 107.75 as of 0343 GMT.
"I believe that the central bank did its best. It reconfirmed its commitment to the stabilisation of the financial markets," said Kong Dong-rak, a fixed-income analyst at Hana Daetoo Securities.
Kong said that the central bank had given a clear signal to the market that it was ready to pump more money into bond purchases as the economy slows sharply.
"The central bank's pledge to print new money reflects how severe this credit crisis is," he said. "Fear of an economic recession and deflation is such that the policymakers have opted for extinguishing the fire, rather than worrying about the consequences of a flood of inflation."
The central bank is under mounting pressure to further cut interest rates but made no mention of plans to do so at its latest meeting. It holds its next monthly interest rate review on Dec. 12.
On Sunday, the country's top financial officials said that they had additional policy options to cope with the global downturn.
South Korea's top financial regulator proposed the bond fund early this month because domestic bond prices have continued to slide even though the central bank has cut policy rates by a total of 125 basis points in three steps since early October.
The yield on three-year corporate bonds <KRCORP=KQ> has jumped about 1 percentage point to 8.67 percent over the period of three rate cuts by the central bank.
The central bank will finance the fund by purchasing treasuries directly from the market and repurchasing its monetary stabilisation bonds before maturity.
It will also inject new cash into the financial system via repurchase agreement deals with bonds issued by commercial banks and Korea Development Bank as underlying assets.
With the new funds from the central bank, banks and other financial companies will buy the corporate bonds to give a lifeline to cash-starved firms, including builders.
State-run Korea Development Bank already plans to contribute 2 trillion won to the fund. Public pension funds, commercial banks, and insurers have been asked to participate in the fund aimed at easing the credit squeeze by buying bonds from companies and commercial banks. (For a factbox on anti-crisis measures click on [ID:nSEO29153] (Writing by Cheon Jong-woo; Editing by Jonathan Thatcher and Tomasz Janowski)
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