[Yeouido Interview] Yongwoo Lee "Financial Market Crisis, Alarm Bells Ringing... Government, No One Steps Forward"

Red Lights Are Already On in the Market
Government Fails to Take Coordinated Action
Situation Could Rival 2008 Financial Crisis
Complex Economic Crisis in 2024 Becoming Reality
Focus Needed on Necessary Measures and Legal Considerations
Fiscal Role Crucial for Low-Income and Vulnerable Groups

Lee Yong-woo, Democratic Party of Korea lawmaker. / Photo by Dong-joo Yoon doso7@

[Asia Economy Reporter Naju-seok] On the 3rd, the chalkboard on one wall of the office of Lee Yong-woo, a member of the Democratic Party of Korea in the National Assembly Members' Office Building, was filled chaotically with complex tables and numbers.

When the reporter looked at the contents written on the chalkboard, Lee explained, "We were discussing a major accident that had occurred." He was having a discussion with his office staff about this issue before the interview. Although it reminded one of the Itaewon tragedy that happened a few days ago, the accident he referred to was the failure of Heungkuk Life Insurance to exercise the 'call option' on hybrid capital securities it had issued in the past to raise funds. Heungkuk Life Insurance issued $500 million of hybrid capital securities, which have characteristics of both stocks and bonds, in November 2017, but did not exercise the call option, which he called an 'accident.' According to Lee, this failure to repay money that should have been conventionally repaid in the international financial market lowered the international credibility of Korean financial companies and accelerated the liquidity crisis.

Lee, a former CEO of KakaoBank and known as a financial expert in the opposition party, analyzed the domestic bond market situation by saying, "Governor Kim Jin-tae of Gangwon Province ignited the spark with a debt guarantee default, causing problems with overseas bond trust." He said, "For individual financial companies, it may be a natural choice (not to exercise the call option because the burden of raising new capital is greater than the interest burden from not exercising it), but considering the current unstable capital market, it was a very naive perception," and diagnosed, "A Korean life insurance financial company became an untrustworthy financial company by not exercising the call option."

Lee pointed out, "(What is surprising is) these actions were taken in consultation with the Financial Services Commission," adding, "The insurance division of the FSC may consider it reasonable, but from the perspective of the entire country, it is absolutely not. The FSC only looked at the company, not the entire (national economy)."

Concerns about the crisis in the bond market and other financial markets led to criticism of the government's response. The market already showed red flags, but the government did not step in. Warning calls and alerts continued, but no responsible person took action, just like in Itaewon last month.

Lee Yong-woo, Member of the Democratic Party of Korea./Photo by Dong-joo Yoon doso7@

The following is a Q&A.

- What is problematic about the government's response to the liquidity freeze in the bond market?

△ After Governor Kim declared a default on the Gangwon Development Corporation bonds, credit was broken and the market became very unstable. Interest rates have already skyrocketed, causing chaos, and all market players know this. However, last month, while the Deputy Prime Minister was visiting the U.S., he said, 'It seems Gangwon Province should respond. It doesn't seem to be at that stage yet.' Investors are not unaware or ignorant. They are checking if the problem is recognized, but the wrong answer caused the market to have a seizure. The Financial Supervisory Service monitors the market, and the FSC also checks daily. The Ministry of Economy and Finance has market analysts, so if the situation becomes dangerous, they should move to come up with countermeasures. But our team (the lawmaker's office) perceives that this is not functioning.

- What warnings were given earlier about this issue?

△ After the default declaration in Gangwon Province, during the National Assembly audit, I asked questions about real estate maturity project financing (PF), etc. At that time, I asked in the audit that a crisis could occur, so that the market could move based on that and prepare accordingly. The financial authorities must have known why we asked this after consulting with the staff. It turned out that Hong Sung-guk, a Democratic Party member, was also demanding the same in the Planning and Finance Committee, but there was no response. What is this? The system is not working.

- What is needed?

△ The important thing is to sound an alert. Only then can there be a response. The problem is that the organization itself is not responding organically. Look at the news from last night (November 2). After the Presidential Office was informed of the disaster, the Minister of the Ministry of the Interior and Safety was informed later, and the Seoul Metropolitan Police Agency chief was informed even later. The system itself is not functioning. A situation comparable to the 2008 financial crisis could come. The authorities must hold frequent meetings and establish an emergency response team and empower it. The FSC, FSS, and Ministry of Economy and Finance should form a response team and respond beyond ministries. The reason I hold meetings in my office is to share such situations together. Only then can we respond together.

- How do you forecast the economy next year?

△ The complex crisis that has been talked about is becoming a reality. Someone has lit a fire but is not thinking about putting out the spark. Consumer sentiment is not improving, and many PFs mature in the first quarter of next year. Now, rather than economic forecasts, it is more important to prepare contingency plans such as how to respond if something happens, what cards are needed for that, and what legal considerations are necessary.

- You argue that the role of fiscal policy is important. Why do you talk about fiscal policy?

△ Companies and financial institutions can also go bankrupt. If resources are inefficiently allocated, I think there is no need to forcibly save them. But those who suffer in this process are ordinary people and vulnerable groups. Fiscal policy must be prepared for them. I think tax cuts can be done depending on the situation. But the important thing now is that fiscal policy must be matched. If tax cuts increase fiscal demand and the government has to fill that gap with fiscal spending, it will have to issue government bonds. Then government bond yields will rise. Then corporate bonds and others will also rise.

- There are concerns about the exchange rate if more money is pumped in.

△ This is a problem related to the roles of the Bank of Korea and the Ministry of Economy and Finance. In a global situation, interest rates cannot be kept low. Assuming interest rate hikes as a given, fiscal policy must respond. The government talks about tax cuts, but if fiscal demand increases, there is no guarantee that the government bond panic that happened in the UK will not happen here. The most important thing in the economy is predictability. It is worrisome to say we should cut fiscal spending when fiscal policy needs to play a big role.

- You spent a long time in finance before entering politics.

△ I was in companies and also in finance. These were heavily regulated industries. Policy authorities should understand how people who accept regulations will react to make policies more effective. It is not good to issue policies disconnected from the field and then say, 'That was not the original intention.' In that sense, it is important to convey opinions sufficiently in the legislature, and I enjoy the work I am doing now.