[Focus] Gov¡¯t credit guarantee to rise 73 trillion won

The plan to expansion credit guarantee announced Jan. 16 by the Ministry of Finance and Economy is exceptional in its scale. It was designed to inject vitality into the squeezed capital market.

However, it is an extreme measure that could trigger a controversy of another public fund, as well as possible insolvency of guarantee institutions.

"Such a credit-supporting measure is vital in order to make the capital market run properly," Lee Jong-Koo, director-general of the ministry's financial policy bureau, said.

Last year, the government offered 33 trillion won of payment guarantees so that private corporations could raise 43 trillion won from the capital market. This year, the government plans to offer 54 trillion won in payment guarantee so that companies can raise 73 trillion won.

In particular, the government is to offer 10 trillion won of guarantee so that domestic firms can reissue 20 trillion won in maturing corporate bonds through primary collateralized bond obligations (CBOs), which are intended to support the Korea Development Bank's acquisition of corporate bonds.

The state-run bank Nov. 3, 2000, offered 7 trillion won in payment guarantees to 235 companies that are expected to survive so that they could raise 10 trillion won of financing. It means that the government is to offering guarantee for most corporate bonds estimated at about 25 trillion won for reissuing, which does not include A-grade blue-chip bonds.

The ministry also created a new primary CBO guarantee system in order to support main creditor banks to allow corporations to reissue bonds and redemption of their lending. Main creditor bank and Credit Guarantee Fund are required to jointly designated target companies by considering their demand for reissuing of corporate bonds, cash flow and credit standing, and more than a half of the raised funds have to be used to repay corporate bonds.

The ministry also is going to offer 37 trillion won in credit guarantees for small and medium-sized venture companies. Particularly, purchaser financing, trade financing and technology-intensive guarantees are the primary targets of support. The primary CBO, exclusively for venture companies, will be offered for guarantee of convertible bonds and bonds with warrant that are issued by companies listed on the Kosdaq. So it is expected to ease the financial crunch of Kosdaq firms.

Still, the potential side effect of the measure won¡¯t be negligible. Experts say that even companies that are subject to liquidation might survive with payment guarantees offered by the government.

Market analysts worry that the ongoing restructuring will be difficult if the government massively offers guarantees in a bid to boost the market. They pointed out that if the guarantees are offered to all companies, regardless of their soundness, it could result in a heavy burden on taxpayers.

The initial question is how to raise 1.4 trillion won of fund required for payment guarantee. It is very likely that the measure turn into a thorny rose that might put both the government and corporations in a moral hazard, according to industry experts.

Choi Young-Hae moneychoi@donga.com