State banks to buy corporate bonds

In an unprecedented market-boosting measure, the government is planning to buy corporate bonds through state-run banks in order to prevent a massive financial crunch expected at the year¡¯s end.

The Ministry of Finance and Economy announced Sunday that marked funds are channeled to some blue-chip banks and that they are not properly lent to corporations, so companies might suffer from financial trouble at the year¡¯s end. For this reason, state-run banks such as Korea Development Bank and Industrial Bank of Korea will be encouraged to directly invest in corporate bonds, according to the ministry.

State-run banks are expected to sell bonds of small and medium-sized enterprises and industrial finance bonds to blue-chip banks and purchase corporate bonds with the fund.

In this case, the funds of blue-chip banks might flow back to state banks and then be lent to corporations. However, the government shall take the risk of directly investing in corporate bonds.

"Investment-trust companies that supplied funds to corporations lost their reliability, so they are unable to invest in corporate bonds now,¡± a high-ranking official at the ministry said. ¡°Nearly 100 trillion won of funds moved from investment-trust companies to banks, but they are reluctant to invest in corporate bonds, which are considered risky assets."

He noted that the industrial finance bonds and SME bonds would be issued through consultation with the relevant banks and investment in corporate bonds would be decided through consultation with the government.

The ministry said that 17.5 trillion won of corporate bonds are to mature at the end of this year with an additional 15 trillion won worth between January and March. They include14 trillion won of bonds issued by the nation's top four chaebol groups and 18.5 trillion won of bonds issued by other major conglomerates.

Choi Young-Hae moneychoi@donga.com