To construct Legoland Korea, the Gangwon provincial government established a special purpose entity [...] GJC, through a subsidiary, issued bonds worth 205 billion won (about $150 million). The bonds were backed [...] as well as a guarantee from the Gangwon provincial government [...]
But Legoland Korea struggled out of the gate, too far from Seoul and too expensive for what was on offer, and it did not generate enough revenue to honor the bonds. [...]
Then came the disaster. Out of the blue, on Sept. 28, Gangwon’s newly elected conservative governor, Kim Jin-tae, announced that he would not honor the government’s guarantee. Instead, GJC would enter into bankruptcy, meaning that creditors would receive pennies on the dollar. [...]
Kim’s declaration was brutally unnecessary. He claimed that he was trying to reduce the debt left behind by his liberal predecessor who, according to Kim, irresponsibly embarked on a white elephant project in Legoland Korea. But Gangwon’s decade-long pursuit of building a Legoland had always been a bipartisan affair, linked more to a hope of revitalizing the province than to any political faction. As a legislator representing Chuncheon, Kim was a vocal advocate for the theme park, claiming in 2014 that he would “jump into the Soyang River” along the city if South Korea’s Cultural Heritage Administration blocked the project because of the ancient artifacts discovered at the construction site. Nor was the bond amount anything excessive. Gangwon’s annual budget is over 17.7 trillion won (about $13 billion), in which a debt of 205 billion won is but a line item.
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Kim’s move, however, has shattered trust in government bonds. In the South Korean bond market, a local government guarantee was previously enough to ensure a bond got the highest rating, approaching the safety of South Korea’s national government bond. By withdrawing Gangwon’s guarantee, Kim demonstrated that a local government’s guarantee could evaporate for a purely political reason.
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Immediately, South Korea’s local government projects ground to a halt. As Gangwon did, South Korea’s local governments issue bonds with their guarantees attached to them in order to build infrastructure, public housing, and other large-scale projects. But Gangwon’s default made those guarantees worthless overnight.
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But the fallout is not limited to local government bonds; it impacts the whole of South Korea’s bond market, worth more than $2 trillion. Corporate bonds are considered less safe than local government bonds.
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Unable to find liquidity either inside of the country or out, South Korea is now facing a nationwide credit crunch. South Korean financial institutions have stopped offering auto loans, as interest rates have climbed to a prohibitive level. Many of South Korea’s housing redevelopment plans, which often cost hundreds of millions of dollars to turn old houses into new high-rises, are being suspended because they cannot find financing, putting enormous pressure on South Korea’s real estate market, which has been losing value at a record pace.
From the article (archive):
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