According to a press report, the South Korean Ministry of Finance recently announced that it would inject the equivalent of more than €30 billion into the domestic money market and buy corporate bonds on a massive scale. This is to prevent the “Legoland crisis” from spreading further in the South Korean financial market, as the “Korea Herald” said.
Plans for the theme park near Chuncheon City in Gangwon Province have been underway since 2010. However, construction has been delayed several times. According to a report by the US foreign policy magazine “Foreign Policy”, archaeological finds initially slowed its construction. Later, there were allegations of bribery and illegal kickbacks. Finally, “Legoland Korea” opened its doors in early May.
Apparently the best conditions
According to international media reports, a consortium of developers, Gangwon Jungdo Development Corp., was created to build the amusement park. (GJC), 44 percent owned by the provincial government and 22.5 percent, according to Foreign Policy, by Merlin Entertainments Group, the British company that owns the rights to Legoland. Theme parks are based on the well-known game of colored stones. Merlin operates dozens of theme parks around the world and employs more than 20,000 people in over 20 countries.
Portal/Yonhap News Agency The implementation of the project took longer than planned and revenues fell short of expectations
For the construction of the park in South Korea, the GJC issued bonds worth 205 billion won (equivalent to almost 150 million euros) through a subsidiary, according to the North American magazine. These were secured with the land where the theme park is located and others in the area. There was also a guarantee from the Gangwon provincial government. The national rating agency Korea Investor Service has certified the bonds with A1, the highest possible credit rating for corporate bonds.
Anything but a safe bank
What seemed like a safe bet turned out not to be. Legoland Korea struggled with issues “from the start”. Located in the northeast of the country, Gangwon-do Province is an important mining region, but it is also a ski region and a popular tourist destination for Koreans. However: too far from the capital Seoul and according to “Foreign Policy” the amusement park is also too expensive for what it offers.
IMAGO/PantherMedia/Najmul Hasan Chuncheon is in a remote location in the northeast of the country
The park did not make enough sales to be able to pay the interest on the bonds. So when house prices dropped and the value of collateral dropped, the problems really started when the first due date rolled around in late September. GJS asked the issuer of its bonds for a delay.
“Then Came Disaster”
“Then came disaster,” wrote the US magazine. The newly elected governor of the province, Kim Jin-Tae, distanced himself from the assurances “out of the blue”. Suddenly, there was an insolvency of the operating company in the room, in mid-October “A1” bonds became “junk”. Kim’s step was absolutely unnecessary, not only because he himself was initially a supporter of the project, but with his announcement he seriously undermined confidence in the country’s bond market. The “Wall Street Journal” wrote about “panic” and “selling” in the bond market.
The amount at stake was not at all astronomical, taking into account the annual budget of the province with its more than 1.5 million inhabitants of around 12.5 billion euros. Furthermore, the regional government would not have to pay the nearly 150 million euros all at once.
Small cause with big effect
However, the risk would have been limited. But: Contrary to the previous custom that a government guarantee can be absolutely reliable, the governor showed with his step that such a guarantee could disappear into thin air “for a purely political reason”. In that regard, the earthquake in the South Korean financial market was not for nothing, Kim’s decision in the current economic situation with rising interest rates everywhere is “almost suicidal” when companies are struggling with their financing.
Issues, for example for residential construction, were canceled and confidence in the bond market was severely damaged. The country faces a liquidity crisis. According to press reports in recent days, in addition to the South Korean government, the Bank of Korea and five other major credit institutions have also injected money into the financial market to stabilize the situation, the equivalent of more than 100 billion euros. The measures ensured calm, but the danger is not yet over.
An “Absurd Crisis”
The press spoke of an “absurd crisis”, and not just because of what triggered it. An amusement park does not cause turmoil in the entire economy every year. What is also absurd about the situation, wrote “Foreign Policy”, is that the central bank, the Bank of Korea, on the one hand drastically raised interest rates to contain inflation and take liquidity out of the market, and at the same time, even time is pumping billions to prevent an economic meltdown prevent. The question is whether she would have any other choice.
Governor as “South Korean Liz Truss”
It was obvious, it was finally said, that Governor Kim had not been able to assess the consequences of his actions (the withdrawal of guarantees). South Korean media such as the “Korea JoongAng Daily” in English called Kim “the Liz Truss of the country”. Both he and the short-term conservative British prime minister managed to damage their country “for purely political reasons” through a crisis of confidence “without reason and through their own fault”. Truss managed to get British pension funds in trouble, Governor Kim, his country’s bond market – through a relatively manageable bankruptcy with completely underappreciated consequences.