The Bank of Korea on Thursday said it will purchase 1.5 trillion won ($1.16 billion) in state bonds to help stabilize the local market hit hard by growing jitters caused by the spread of the new coronavirus.
"The Bank of Korea decided to purchase state bonds to help stabilize the bond market and expand its holdings subject to repurchase agreements," the central bank said in a press release.
The announcement came shortly after local authorities said they are ready to step in if necessary to help ease a potential credit crunch.
"The government will swiftly take market stabilization steps under its contingency plans if needed, so businesses will not face difficulties in securing necessary funds," Vice Finance Minister Kim Yong-beom said after a meeting in Seoul to review the country's financial condition.
The official said there are some signs of a credit crunch in the global financial market and demand for the US dollar is accelerating.
"We are closely paying attention to the possible credit crunch in the global market, and will step up dollar funding," he said.
Kim said the steps under review may include expanding primary collateralized bond obligations (P-CBOs) scheme, a move aimed at helping ease credit crunch for low-rated companies.
After an emergency economic council meeting, chaired by President Moon Jae-in, Finance Minister Hong Nam-ki said the government will expand its P-CBOs scheme to 6.7 trillion won over the next three years.
"The difficulties in economic conditions and in securing funds are more serious to small businesses and self-employed people.
Support for such vulnerable economic players is desperately needed until the market normalizes," Hong told a press conference.
The move comes as part of the government's latest 50 trillion-won support package aimed at assisting local businesses, mostly small and medium-sized firms, but also at stabilizing local financial markets.
The support package also calls for the establishment of new stock and bond market stabilization funds.
Hong said the size of the funds will be determined later, but Financial Services Commission chief, Eun Sung-soo, said the bond stabilization fund alone will be worth at least 10 trillion won.
The local bond market has been suffering a jolt as major economies, including the United States, sharply cut their policy rates to minimize the economic fallout from the spread of the new coronavirus.
The US Fed slashed its base rate by a whopping 1.5 percentage points in two emergency rate cuts, sending its rates to a target range of 0-0.25 percent.
The Bank of Korea followed suit, slashing its own rate by 0.5 percentage point to 0.75 percent this week in its first emergency rate cut in more than a decade. (Yonhap)