South Korea warns of global credit crunch as surging US dollar slugs emerging markets

SEOUL (REUTERS) – South Korea warned on Thursday (March 19) of a possible global credit crunch as financial market disruptions caused by the coronavirus pandemic trigger a broad selloff in bonds and a scramble for US dollar funding in emerging markets.

Vice finance minister Kim Yong-beom vowed to roll out measures to ease wild market volatility, as the won slid a further 3 per cent against the dollar on Thursday to hit a decade low.

Most other Asian emerging market currencies also skidded, with Indonesia’s rupiah sinking to its weakest level since 1998.

In an emergency policy meeting, Kim said spiking costs for obtaining US dollars and capital outflows from emerging economies’ stock markets could mean the world may be heading to a global credit crunch.

“It isn’t just an issue for us (Korea) but foreign investment is flowing out of the country across emerging markets and are adding pressures to stocks and FX markets,” Kim said.

South Korea will support dollar funding needs of local companies and vowed to inject funds into local bond market if needed, he added.

The comments come after the government on Wednesday relaxed one of its key capital flow rules to inject more dollars into its banking system to ensure businesses have enough greenbacks to come through a funding crunch unscathed.

The Bank of Korea was working in tandem. It held a 1 trillion won (S$1.13 billion) repo auction on Thursday morning to add fresh capital into local brokerages.

The auction drew orders for nearly twice the offered amount, suggesting high demand for liquidity support in the financial sector.

The global flight to safety has taken the won to a 10-year low, and the Bank of Korea was suspected of selling dollars on Thursday morning to slow its declines as it neared 1,260 won per dollar.

The Korea Exchange said on Thursday circuit breakers were triggered on the benchmark KOspi stock index after it plunged more than 8 per cent. The index is set to post its sharpest daily fall since late 2008.

South Korean treasury bond yields rose sharply across the board as the panic spread, with the benchmark 10-year yield rising 11.5 basis points as of 0250 GMT to 1.613 per cent, according to Refinitiv data.

South Korea’s President Moon Jae-in on Thursday also pledged 50 trillion won in emergency financing for small businesses along with other stimulus measures to help shore up its economy, which has been battered by the coronavirus crisis.

The other measures include relaxing loan terms for small businesses and offering low interest loans. The government also promised to guarantee loans for those hit by the virus impact.

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