[Column] The Bomb Dropped by Kim Jin-tae, Governor of Gangwon-do

[Asia Economy Reporter Minji Lee] Originally, the term ‘villain’ referred to villains like the Joker, but these days it is often used for people who behave strangely or differently from others.

Last month, while everyone was focused solely on Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), and worried about interest rate hikes, Kwasi Kwarteng, the UK Chancellor of the Exchequer, who announced a large-scale tax cut plan, was the ‘villain’ of the global financial market. By acting out of sync with other countries strengthening their finances due to recession concerns, he stirred up turmoil in an already difficult financial market.

When fear accumulates and even small issues become sensitive, the shock a villain inflicts on the market is even fiercer. At the end of last month, when Kim Jin-tae, Governor of Gangwon Province, announced that he would delay payments on the 205 billion won scale LegoLand asset-backed commercial paper (ABCP) guaranteed by Gangwon Province, the bond market had a major seizure. Upon news that a default had occurred on the highest-rated (A1) bonds guaranteed by a local government, the commercial paper (CP) interest rate surged by 90 basis points (1bp=0.01%P) in one month, approaching the 4% range, jumping to levels seen during the 2008 financial crisis. Authorities quickly activated the bond stabilization fund to calm the startled market.

Governor Kim tried to withdraw because LegoLand was a failed project initiated by the previous governor. The problem is that LegoLand ABCP is a bond equivalent to government bonds. Since the local government guaranteed it, it is interpreted as if the national government guaranteed it. These days, the bond market is so difficult that people say it is similar to the global financial crisis. With interest rate hikes and a real estate market downturn, the project financing (PF) market is even tougher. In such a market, a state institution like a local government threw a bomb.

In the end, the UK admitted the large-scale tax cut plan was a ‘mistake’ and bowed its head for causing turmoil in the global financial market. It was a measure to stabilize the financial market and restore trust. Perhaps this is the kind of response the market expected from Gangwon Province. No more villains, please.