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Legoland bond crisis threatens South Korea's economy

338 points by lawrenceyan 4y ago

Victerius 4y ago
> 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. Also, as South Korea’s real estate market softened, the value of the real estate backing the bonds began falling below the amount of the debt. This is the heart of the problem. I know the current South Korean president owes his victory in part to popular resentment in the face of the Moon administration's inability to stem the explosive growth of housing costs in Seoul. Could it be that the target demographic for this Legoland just doesn't have enough disposable income or free time to make the asset profitable? It sure seems like it. Other Legolands around the world don't struggle with profitability. Distance isn't an issue for car owners. But cars are more expensive than ever. And shelter costs in SK are too high in proportion to household incomes. Housing speculators and NIMBYs are going to kill capitalism.
- wins32767 4y ago
  I'm not sure how you see that a small piece of bad debt is the heart of the problem versus a government repudiating a loan guarantee during increasingly severe global contraction thus destroying the market for more risky (e.g. corporate) debt.
- crunchyfrog 4y ago
  This is definitely not the heart of the problem. Governments issue bonds for what turn out to be bad investments all the time. The heart of the problem was the completely unnecessary default which seems to have been done for petty and self-defeating political reasons.
  - summerlight 4y ago
    > Governments issue bonds for what turn out to be bad investments all the time. Yeah, and this is even worse since Gangwon-do is an extremely rural and aging area without any hope of future growth. It only contributes 2% of the total GDP in South Korea and is rapidly shrinking. No sane private entity would go there without government supports since none of significant development there would make financial feasibility. It's where a government is supposed to intervene. The current governor (who was a prosecutor like Yoon anyway) seems to consider this as a really good chance to put their political opponents into jail and they need to access confidential information to make the case. The default is a necessary part for the grand scheme and he probably was willing to make that sacrifice. He was just not competent enough to understand its implication.
- yongjik 4y ago
  I do think Legoland should never have been built there (they found one of the largest bronze age settlements ever found in Korea - they built freaking Legoland on top of it anyway), but it was built, and defaulting on bonds was probably the stupidest thing anyone could have done with it. I mean, someone could've sneaked in with a can of gasoline at night and burnt the whole thing down, and it would have cost less on the Korean economy.
  - imtringued 4y ago
    So you are telling me they could have built lower cost tourist attractions based on the bronze age history of the location but they decided to pave over their money maker because Legoland is an internationally recognized brand?
    - yongjik 4y ago
      Well, in terms of money-making, the bronze age settlement would have made, at best, a small provincial museum that attracted a negligible number of people. Nobody drives an hour to see some stones arranged in the shape of a house. Builders bulldozing over irreplaceable ancient sites are not exactly unique to Korea, after all. (At least this one got excavated.)
- prottog 4y ago
  > Housing speculators and NIMBYs are going to kill capitalism. No arguments with the sentiment, but keep in mind that South Korea is roughly the size of Indiana (the 12th-smallest state) and over two-thirds of what land they have is mountainous, populated by over 50 million people. It's hard not to have relatively expensive housing in that country, just based on the sheer lack of availability of land. Of course, it doesn't help that half the country lives in the Seoul Capital Area.
lovich 4y ago
This was a fascinating read. Is there any sort of explanation or analysis out there on why so many political leaders as of late believe they can alter the deal and then keep the same level of trust immediately afterwards? I know this happens occasionally and I may just be seeing a pattern that’s not there, but it seems like a noticeable uptick in leaders who don’t understand why people they just fucked over won’t trust their IOUs anymore
- halpmeh 4y ago
  Modern monetary theory, most likely.
  - cool_dude85 4y ago
    This far-right politician believes in MMT?
    - downrightmike 4y ago
      Only because they think it means "Its __My__ Money Today!"
    - halpmeh 4y ago
      It's unlikely that this politician explicitly believes in MMT, but the belief that you can somehow wish debt away in in-line with MMT. And of course, any philosophy exists within the zeitgeist of the times. After the GFC, a lot of people in the world started to believe that money is somehow imaginary.
      - mindslight 4y ago
        > the belief that you can somehow wish debt away in in-line with MMT The belief that you can wish debt away is rooted in the Keynesianism/Reaganomics of the past five decades. MMT basically just accepts the realpolitik that the enormous handouts to the financial industry will never be stopped, and says that we might as well use some of the new money deliberately. From my economically conservative Austrian perspective, at least MMT appears intellectually honest. MMT also corrects/shortens the feedback path from monetary creation to price inflation, rather than relying on the roundabout feedback path that has created this ever-growing asset bubble.
gnabgib 4y ago
https://archive.ph/pURO3 https://archive.ph/pURO3
datavirtue 4y ago
Seems to have very little to do with theme parks. Goofy American: Why don't they just print more money?
- jaywalk 4y ago
  According to the article, they did end up printing more money.
halpmeh 4y ago
Wow, this was so interesting. I always feel two steps behind when I read news like this? Does anyone who works in the finance sector have tips for staying up with the news? Like how do you find out that a random local government in South Korea has defaulted on its debt, how do you understand the significance of the event (as I'm sure many defaults happen every day), and how do you track the effects of these events?
- FredPret 4y ago
  The human economy is a complex animal. There is no simple way to understand it all
  - toomuchtodo 4y ago
    Attempting to can be an enjoyable experience though.
    - brookst 4y ago
      And an imperfect understanding is better than none.
- xwdv 4y ago
  Stocktwits
  - throwaway743 4y ago
    Oh man... going to any one thread there... you can smell the marlboro reds and desperation through your screen
- djbusby 4y ago
  Bloomberg Terminal has a firehose of news, especially news about money things.
  - prox 4y ago
MichaelZuo 4y ago
Thought this was an Onion article at first... still difficult to believe that the South Koreans would let their economy get so close to the edge like that. EDIT: Especially since "To prevent the credit market from seizing up completely, the South Korean government stepped in by providing a liquidity facility of more than 50 trillion won (about $35 billion). The Bank of Korea also injected 42.5 trillion won (about $31 billion) to stabilize the short-term bond market, and South Korea’s five largest banks also pledged to provide up to 95 trillion won (about $67 billion) in liquidity." Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust? Especially since S.K. is a unitary country and not federated so local governments have no sovereignty.
- bobthepanda 4y ago
  That rolls back the lack of trust in that specific project but does not prevent contagion (“who’s next? Who else was doing this?”) Moves like this are supposed to be reassuring to the broader market. Punishment is something done after an error but does not guarantee that someone else also didn’t do this, and punishment doesn’t go back in time and undo actions. If you are not decisive enough the markets can quickly spiral into contagion, however rational that may be. (See: the prolonged cascading during the Euro crisis)
  - NotYourLawyer 4y ago
    I dunno, I think that’d be a pretty good signal to the market that these kind of shenanigans aren’t gonna fly and won’t keep happening.
    - bobthepanda 4y ago
      The important thing to signal is not that, but that’s necessary to do later. The important thing to signal is that investments are safe, even if other investments might fall prey to the same issue. Doing just the former means that everyone is suspicious of everything they currently hold, and will be too spooked to invest even in new perfectly good ones until they get clarity on everything, causing the market to seize up. Justice and auditing takes time, but the need to refinance bonds is pretty much constant.
woah 4y ago
Is this the end of Legos?
- djbusby 4y ago
  Obviously not.
- goto11 4y ago
  The Legoland theme parks are not even owned by Lego anymore. Edit: Apparently I was wrong. Lego sold the themeparks during a downturn 20 years ago, but actually bought them back a few years ago, and now consider them a strategic part of the brand.
  - bombcar 4y ago
    Lego was in a pretty bad place 20 years ago, now they're the largest toy company in the world, with revenues of around $8billion.
    - fbdab103 4y ago
      Wild. I would have guessed those Funco Pop toys that I see for seemingly every possible movie, game, comic book, anime, etc. That chunk of plastic feels like it must be selling for a ridiculously good margin.
      - bombcar 4y ago
        I still have never EVER seen someone actually buy one of those. I swear they stock the shelves with them and then return them.
vkou 4y ago
> Imagine the turmoil if a newly elected president of the United States announced that the U.S. government would no longer honor any outstanding Treasury bills because most of them were issued under his profligate predecessor. Actually, I think the reason that the Gangwon government is not going to honor outstanding debts, here, is because the value of the collateral[1] has fallen below the outstanding cost of the debt. In such a situation, any rational economic actor would at least contemplate defaulting. [1] In this case, the collateral was land (which has plummeted in value, and the creditors are welcome to), and his government assurances (to which Kim Jin-tae seems to assign a value of ~zero.[2]) [2] Which is the real scandal, and his constituents should be looking into hemp and lamp-posts. He, in his stewardship of the region burnt down an asset of significant value for a pittance of a budget line item. Burning the furniture to stay warm, and all that.
- ender341341 4y ago
  That's a reasonable take for private businesses, and it would reflect poorly on that businesses reputation, when the government does it the trust is also lost, but there's also more consequences the bigger the starting trust was. There's a reason even with low interest rates US bonds are popular, if they default the rest of your investments are likely SOL too. The US faced similar issues previously before the federal government stepped in and outlawed states defaulting. https://en.wikipedia.org/wiki/State_defaults_in_the_United_States https://en.wikipedia.org/wiki/State_defaults_in_the_United_S...
  - JamesianP 4y ago
    It would be more analogous to some state announcing it will not bail out a state-sponsored corporate enterprise, and instead allow it go bankrupt in a downturn. From another perspective it is sanity, protecting taxpayers from being on the hook for speculation. The entire complaint here hinges on some kind of butterfly-effect argument, plus the precise wording of a "guarantee" that was only pointed at vaguely in the article.
    - ender341341 4y ago
jontro 4y ago
How is even possible to retract a loan guarantee? I doubt that's possible in other countries
- 627467 4y ago
  I guess many thought sovereign gold reserves were also impossible to sieze and yet...
- anm89 4y ago
  I'm always confused by this type of perspective. It's like asking "how is it possible to lie" or "how is it possible to say xyz" What laws of physics prevent people from reneging on financial agreements? It happens a million times a day. It's one of the most believable human interactions. What part of it doesn't feel possible to you?
  - happyopossum 4y ago
    The part where there are no checks and balances. No court to issue a decision saying it had to be honored.
- everybodyknows 4y ago
  This is a question for an expert in the South Korean legal system. If a US state governor OTOH tried such a move, I'd expect litigation.
Night_Thastus 4y ago
Very interesting stuff. The kind of domino effect shown here is a really great example of how much of modern economics is based off of mutual trust of the parties involved, and how that trust binds together so many disparate individuals, companies and other groups that you wouldn't otherwise expect to be involved at all.
- _hcuq 4y ago
  Leverage probably paid a big part too.
Apocryphon 4y ago
When I heard of this story, two fanciful case studies came to mind- The Kingdom of Scotland attempts to build a colony in modern day Panama, goes bankrupt, looks to the English for support, leading to the creation of modern day Britain as well know it. https://en.wikipedia.org/wiki/Darien_scheme https://en.wikipedia.org/wiki/Darien_scheme The Soviets being scared by Reagan's far out orbital SDI promises ("the Star Wars program"), causing them to overspend on defense and eventually go bust. https://en.wikipedia.org/wiki/Strategic_Defense_Initiative https://en.wikipedia.org/wiki/Strategic_Defense_Initiative Not saying anything this drastic will necessarily happen to South Korea, but it's not the first time in history that a ridiculous boondoggle led to problems for an entire nation's finances.
- fbdab103 4y ago
  >...causing them to overspend on defense and eventually go bust. I heard this in school, but it felt like post-Cold war propaganda. Is this considered a true rendition of events? By all accounts, both sides just kept ramping up spending, it was just that Russia's line of credit ended sooner.
  - PaulHoule 4y ago
    ... the Soviet Union spent a tremendous amount on S-300 antiaircraft missiles, probably enough to shoot down all the planes on Earth because they were afraid of getting bombed. This is why they won't run out in the Ukraine war and even use them against ground targets.
    - deleted 4y ago
      [deleted]
  - p_l 4y ago
    Similarly, I've heard opinions attributed to Gorbachev that the thing that really broke the system was costs of Chornobyl cleanup. Another thing usually missed in the "West" is that Soviet Union pretty much never stopped being in crash industrialization mode due to how poor its starting position was.
tqi 4y ago
> 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. If few buyers are brave enough to buy local government bonds under these conditions, even fewer buyers can muster enough courage to buy corporate bonds. Can someone explain this part? While the knock-on effect on other municipal bonds makes sense, I would have expected this to make corporate bonds more attractive since the demand would have shifted?
- legitster 4y ago
  If you are buying government bonds, it means you are really risk averse. Cash is probably a better option to you.
  - snikeris 4y ago
    Not necessarily. Some people buy 30 year treasuries specifically because they are more volatile than shorter duration bonds.
rsj_hn 4y ago
I upvoted this story because it was interesting and fun to read, but there are a few problems with the article. 1. The author makes it seem like South Korea's credit problems are due to LegoLand announcement, rather than the global crisis of high inflation forcing governments to raise interest rates, causing projects to go bust all over. It's not clear how much of this was caused by Legoland and how much Legoland is just an example of bond market troubles after an unprecedented period of low rates that created unrealistic investor expectations of risk, and the subsequent repricing when rates start to go up. E.g. municipal debt should never be priced the same as federal government debt, because the Federal government is a currency issuer with a central bank, whereas the municipal government is a currency user, and there is nothing wrong with a project backed by a local government from declaring bankruptcy -- investors should not price that at zero risk. 2. The author (who is a lawyer, not an economist) believes that a reduction of new housing causes real estate values to fall, rather than increase. 3. The belief that high interest rates are designed to reduce "liquidity" and that therefore emergency liquidity measures somehow contradict a policy of rate hikes. Here I will rant a bit. Use of "liquidity" in financial journalism is usually a red flag as most reporters don't understand it. They think it means "money". They view the market as a big bag in which the government dumps money when it lowers rates, or removes money from the bag when rates go up. You see similar reporting on the stock market, which they also view as a big bag in which investors pour money in or remove money out -- forgetting that in a stock exchange, for every buyer there is a seller. Bottom line, money going into or out of a bag is generally the only mental model available in financial journalism. There are exceptions, but you see it everywhere and it drives me crazy. This is why the author believes it's a contradiction and irony that the South Korean government would announce emergency lending facilities even as it raises rates. But what liquidity refers to is how quickly/efficiently can you convert something into cash. For example, a liquidity crisis in the bond market means that you can't use the bond as collateral for cash loans. Bonds becoming discounted more is not a reduction in liquidity, it just means the bonds are worth less because interest rates are higher. But as long as you can use them for collateral according to their expected value, then the bond market remains "liquid" regardless of the interest rate. When liquidity is threatened, the central bank steps in and says "We will accept these bonds as collateral for cash loans". Note that the central bank is still applying the policy discount rate, which may be high. In this article, several large banks banded together to make this announcement as well - that they would accept bonds as collateral for loans. Such a step has nothing to do with rate hikes, and does not undermine the rate hike program, it only undermines the bag-of-liquidity metaphor. No government raises interest rates to reduce liquidity or lowers rates to increase liquidity, rate hikes are done to manage inflation and/or foreign exchange rates, whereas the tools to manage liquidity are discount windows, swap lines, and emergency lending facilities. They are separate tools with separate macroeconomic targets.
legitster 4y ago
Wow. All over a tiny $150 million dollar bond. A good reminder how we take for granted systems that are stable. When often time they are only stable because of vigilance.
- HWR_14 4y ago
  No, all over interest payments for 4 months on a $150 MM bond. So, even at 12% APR, $6 MM. But it became unstable because it suddenly made government bonds suspect. Like, if the US Treasury announced it was just not going to pay back a $1MM bond issue, the US and world markets would tank. Size is irrelevant.
  - mjevans 4y ago
    Trust is priceless, as in irreplaceable. It's exactly why the laws should, maybe not make it impossible, but require a very high bar be crossed to do the sort of actions that breach that trust. As an example. The US debt ceiling thing, it really should be the reverse. It should take a 'super majority' of congress voting against raising that ceiling to limit it, even if it's an agenda item automatically included in each session's docket.
GauntletWizard 4y ago
I'm headed to Korea in a week, and my main takeaway from this is that I am considering going and checking out this boondoggle instead of Lotte World
- anm89 4y ago
  I strongly recommend this. Lotte world is ultra over rated. Go explore the country side. Endless cool stuff out there.
  - pigtailgirl 4y ago
    -- Lotte world is pretty fun if you're already staying in Seoul and want to visit amusement park - if lover of amusement parks tho - E-World in Daegu = a lot of fun - tho Daegu is a boring city generally - but - Chuncheon is super easy to get to - the dakgalbi there is actually much better --
    - anm89 4y ago
      I love dalkgalbi!
    - GauntletWizard 4y ago
      I'm mostly going to be in Seoul but I have plans for a weekend in Busan; Maybe I'll catch an early train to Daegu, stay there for a night and then onwards to Busan.
0x4d464d48 4y ago
Dear lord! Talk about an own goal...
627467 4y ago
Sit tight for many such events. The world is living in a hangover of cheap credit and money for too long. Governments don't know how to govern without this anymore.
leemailll 4y ago
It's unbelievable the new governor cause such a turmoil on the financial market over less than 0.1% of the annual budget. Though the article said nothing about the possible causes of the move, but it is hard to believe he or any of his party didn't foresee the disaster
- ilyt 4y ago
  There are plenty of morons that also happen to be charismatic enough to be picked in political role, that's entirely unsurprising
microtherion 4y ago
If you had "recession due to economy stepping on a LEGO" on your bingo cards for 2022, you may win.
giggyhack 4y ago
> The far-right politician is not known for his economic erudition, as he gained notoriety by being the standard-bearer for impeached President Park Geun-hye and claiming that the 1980 Gwangju Uprising, in which South Korea’s dictatorship massacred thousands of pro-democracy protesters, was a North Korean insurrection. So he acts on gut instinct alone, without listening to expert advisors, and uses propaganda and fake news tactics to win supporters. Sounds a lot like several major ousted dictators. Reap what you sow, SK. I hope you see through this BS quickly.
- ErikVandeWater 4y ago
  >> The far-right politician is not known for his economic erudition, as he gained notoriety by being the standard-bearer for impeached President Park Geun-hye and claiming that the 1980 Gwangju Uprising, in which South Korea’s dictatorship massacred thousands of pro-democracy protesters, was a North Korean insurrection. > So he acts on gut instinct alone, without listening to expert advisors This statement is not supported in your quote, or in the article. One can listen and disagree.
  - isitmadeofglass 4y ago
    Are you suggesting that experts advices that they should default on A1 bonds even though they could clearly manage to extend and pay them? That seems highly unlikely. I don’t think any expert in the field would have such disregard for the importance of trust in the system.
boringg 4y ago
Amazing. Tl, Dr: Uneducated but confident man gets power tanks economy for politics and not understanding the basics of finance (or listening to other people smarter then him). Honestly whats happening to this world.
tokai 4y ago
>The same lesson applies to Britain, South Korea, and everywhere: Electing bad politicians leads to a bad economy. But Truss wasn't elected (by the voters of UK).
- LatteLazy 4y ago
  People did elect Johnson and May though...

338 points by lawrenceyan 4y ago

> 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. Also, as South Korea’s real estate market softened, the value of the real estate backing the bonds began falling below the amount of the debt. This is the heart of the problem. I know the current South Korean president owes his victory in part to popular resentment in the face of the Moon administration's inability to stem the explosive growth of housing costs in Seoul. Could it be that the target demographic for this Legoland just doesn't have enough disposable income or free time to make the asset profitable? It sure seems like it. Other Legolands around the world don't struggle with profitability. Distance isn't an issue for car owners. But cars are more expensive than ever. And shelter costs in SK are too high in proportion to household incomes. Housing speculators and NIMBYs are going to kill capitalism.

wins32767 4y ago
I'm not sure how you see that a small piece of bad debt is the heart of the problem versus a government repudiating a loan guarantee during increasingly severe global contraction thus destroying the market for more risky (e.g. corporate) debt.
crunchyfrog 4y ago
This is definitely not the heart of the problem. Governments issue bonds for what turn out to be bad investments all the time. The heart of the problem was the completely unnecessary default which seems to have been done for petty and self-defeating political reasons.
- summerlight 4y ago
  > Governments issue bonds for what turn out to be bad investments all the time. Yeah, and this is even worse since Gangwon-do is an extremely rural and aging area without any hope of future growth. It only contributes 2% of the total GDP in South Korea and is rapidly shrinking. No sane private entity would go there without government supports since none of significant development there would make financial feasibility. It's where a government is supposed to intervene. The current governor (who was a prosecutor like Yoon anyway) seems to consider this as a really good chance to put their political opponents into jail and they need to access confidential information to make the case. The default is a necessary part for the grand scheme and he probably was willing to make that sacrifice. He was just not competent enough to understand its implication.
yongjik 4y ago
I do think Legoland should never have been built there (they found one of the largest bronze age settlements ever found in Korea - they built freaking Legoland on top of it anyway), but it was built, and defaulting on bonds was probably the stupidest thing anyone could have done with it. I mean, someone could've sneaked in with a can of gasoline at night and burnt the whole thing down, and it would have cost less on the Korean economy.
- imtringued 4y ago
  So you are telling me they could have built lower cost tourist attractions based on the bronze age history of the location but they decided to pave over their money maker because Legoland is an internationally recognized brand?
  - yongjik 4y ago
    Well, in terms of money-making, the bronze age settlement would have made, at best, a small provincial museum that attracted a negligible number of people. Nobody drives an hour to see some stones arranged in the shape of a house. Builders bulldozing over irreplaceable ancient sites are not exactly unique to Korea, after all. (At least this one got excavated.)
prottog 4y ago
> Housing speculators and NIMBYs are going to kill capitalism. No arguments with the sentiment, but keep in mind that South Korea is roughly the size of Indiana (the 12th-smallest state) and over two-thirds of what land they have is mountainous, populated by over 50 million people. It's hard not to have relatively expensive housing in that country, just based on the sheer lack of availability of land. Of course, it doesn't help that half the country lives in the Seoul Capital Area.

lovich 4y ago

This was a fascinating read. Is there any sort of explanation or analysis out there on why so many political leaders as of late believe they can alter the deal and then keep the same level of trust immediately afterwards? I know this happens occasionally and I may just be seeing a pattern that’s not there, but it seems like a noticeable uptick in leaders who don’t understand why people they just fucked over won’t trust their IOUs anymore

halpmeh 4y ago
Modern monetary theory, most likely.
- cool_dude85 4y ago
  This far-right politician believes in MMT?
  - downrightmike 4y ago
    Only because they think it means "Its __My__ Money Today!"
  - halpmeh 4y ago
    It's unlikely that this politician explicitly believes in MMT, but the belief that you can somehow wish debt away in in-line with MMT. And of course, any philosophy exists within the zeitgeist of the times. After the GFC, a lot of people in the world started to believe that money is somehow imaginary.
    - mindslight 4y ago
      > the belief that you can somehow wish debt away in in-line with MMT The belief that you can wish debt away is rooted in the Keynesianism/Reaganomics of the past five decades. MMT basically just accepts the realpolitik that the enormous handouts to the financial industry will never be stopped, and says that we might as well use some of the new money deliberately. From my economically conservative Austrian perspective, at least MMT appears intellectually honest. MMT also corrects/shortens the feedback path from monetary creation to price inflation, rather than relying on the roundabout feedback path that has created this ever-growing asset bubble.

gnabgib 4y ago

https://archive.ph/pURO3 https://archive.ph/pURO3

datavirtue 4y ago

Seems to have very little to do with theme parks. Goofy American: Why don't they just print more money?

jaywalk 4y ago
According to the article, they did end up printing more money.

halpmeh 4y ago

Wow, this was so interesting. I always feel two steps behind when I read news like this? Does anyone who works in the finance sector have tips for staying up with the news? Like how do you find out that a random local government in South Korea has defaulted on its debt, how do you understand the significance of the event (as I'm sure many defaults happen every day), and how do you track the effects of these events?

FredPret 4y ago
The human economy is a complex animal. There is no simple way to understand it all
- toomuchtodo 4y ago
  Attempting to can be an enjoyable experience though.
  - brookst 4y ago
    And an imperfect understanding is better than none.
xwdv 4y ago
Stocktwits
- throwaway743 4y ago
  Oh man... going to any one thread there... you can smell the marlboro reds and desperation through your screen
djbusby 4y ago
Bloomberg Terminal has a firehose of news, especially news about money things.
- prox 4y ago

MichaelZuo 4y ago

Thought this was an Onion article at first... still difficult to believe that the South Koreans would let their economy get so close to the edge like that. EDIT: Especially since "To prevent the credit market from seizing up completely, the South Korean government stepped in by providing a liquidity facility of more than 50 trillion won (about $35 billion). The Bank of Korea also injected 42.5 trillion won (about $31 billion) to stabilize the short-term bond market, and South Korea’s five largest banks also pledged to provide up to 95 trillion won (about $67 billion) in liquidity." Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust? Especially since S.K. is a unitary country and not federated so local governments have no sovereignty.

bobthepanda 4y ago
That rolls back the lack of trust in that specific project but does not prevent contagion (“who’s next? Who else was doing this?”) Moves like this are supposed to be reassuring to the broader market. Punishment is something done after an error but does not guarantee that someone else also didn’t do this, and punishment doesn’t go back in time and undo actions. If you are not decisive enough the markets can quickly spiral into contagion, however rational that may be. (See: the prolonged cascading during the Euro crisis)
- NotYourLawyer 4y ago
  I dunno, I think that’d be a pretty good signal to the market that these kind of shenanigans aren’t gonna fly and won’t keep happening.
  - bobthepanda 4y ago
    The important thing to signal is not that, but that’s necessary to do later. The important thing to signal is that investments are safe, even if other investments might fall prey to the same issue. Doing just the former means that everyone is suspicious of everything they currently hold, and will be too spooked to invest even in new perfectly good ones until they get clarity on everything, causing the market to seize up. Justice and auditing takes time, but the need to refinance bonds is pretty much constant.

woah 4y ago

Is this the end of Legos?

djbusby 4y ago
Obviously not.
goto11 4y ago
The Legoland theme parks are not even owned by Lego anymore. Edit: Apparently I was wrong. Lego sold the themeparks during a downturn 20 years ago, but actually bought them back a few years ago, and now consider them a strategic part of the brand.
- bombcar 4y ago
  Lego was in a pretty bad place 20 years ago, now they're the largest toy company in the world, with revenues of around $8billion.
  - fbdab103 4y ago
    Wild. I would have guessed those Funco Pop toys that I see for seemingly every possible movie, game, comic book, anime, etc. That chunk of plastic feels like it must be selling for a ridiculously good margin.
    - bombcar 4y ago
      I still have never EVER seen someone actually buy one of those. I swear they stock the shelves with them and then return them.

vkou 4y ago

> Imagine the turmoil if a newly elected president of the United States announced that the U.S. government would no longer honor any outstanding Treasury bills because most of them were issued under his profligate predecessor. Actually, I think the reason that the Gangwon government is not going to honor outstanding debts, here, is because the value of the collateral[1] has fallen below the outstanding cost of the debt. In such a situation, any rational economic actor would at least contemplate defaulting. [1] In this case, the collateral was land (which has plummeted in value, and the creditors are welcome to), and his government assurances (to which Kim Jin-tae seems to assign a value of ~zero.[2]) [2] Which is the real scandal, and his constituents should be looking into hemp and lamp-posts. He, in his stewardship of the region burnt down an asset of significant value for a pittance of a budget line item. Burning the furniture to stay warm, and all that.

ender341341 4y ago
That's a reasonable take for private businesses, and it would reflect poorly on that businesses reputation, when the government does it the trust is also lost, but there's also more consequences the bigger the starting trust was. There's a reason even with low interest rates US bonds are popular, if they default the rest of your investments are likely SOL too. The US faced similar issues previously before the federal government stepped in and outlawed states defaulting. https://en.wikipedia.org/wiki/State_defaults_in_the_United_States https://en.wikipedia.org/wiki/State_defaults_in_the_United_S...
- JamesianP 4y ago
  It would be more analogous to some state announcing it will not bail out a state-sponsored corporate enterprise, and instead allow it go bankrupt in a downturn. From another perspective it is sanity, protecting taxpayers from being on the hook for speculation. The entire complaint here hinges on some kind of butterfly-effect argument, plus the precise wording of a "guarantee" that was only pointed at vaguely in the article.
  - ender341341 4y ago

jontro 4y ago

How is even possible to retract a loan guarantee? I doubt that's possible in other countries

627467 4y ago
I guess many thought sovereign gold reserves were also impossible to sieze and yet...
anm89 4y ago
I'm always confused by this type of perspective. It's like asking "how is it possible to lie" or "how is it possible to say xyz" What laws of physics prevent people from reneging on financial agreements? It happens a million times a day. It's one of the most believable human interactions. What part of it doesn't feel possible to you?
- happyopossum 4y ago
  The part where there are no checks and balances. No court to issue a decision saying it had to be honored.
everybodyknows 4y ago
This is a question for an expert in the South Korean legal system. If a US state governor OTOH tried such a move, I'd expect litigation.

Night_Thastus 4y ago

Very interesting stuff. The kind of domino effect shown here is a really great example of how much of modern economics is based off of mutual trust of the parties involved, and how that trust binds together so many disparate individuals, companies and other groups that you wouldn't otherwise expect to be involved at all.

_hcuq 4y ago
Leverage probably paid a big part too.

Apocryphon 4y ago

When I heard of this story, two fanciful case studies came to mind- The Kingdom of Scotland attempts to build a colony in modern day Panama, goes bankrupt, looks to the English for support, leading to the creation of modern day Britain as well know it. https://en.wikipedia.org/wiki/Darien_scheme https://en.wikipedia.org/wiki/Darien_scheme The Soviets being scared by Reagan's far out orbital SDI promises ("the Star Wars program"), causing them to overspend on defense and eventually go bust. https://en.wikipedia.org/wiki/Strategic_Defense_Initiative https://en.wikipedia.org/wiki/Strategic_Defense_Initiative Not saying anything this drastic will necessarily happen to South Korea, but it's not the first time in history that a ridiculous boondoggle led to problems for an entire nation's finances.

fbdab103 4y ago
>...causing them to overspend on defense and eventually go bust. I heard this in school, but it felt like post-Cold war propaganda. Is this considered a true rendition of events? By all accounts, both sides just kept ramping up spending, it was just that Russia's line of credit ended sooner.
- PaulHoule 4y ago
  ... the Soviet Union spent a tremendous amount on S-300 antiaircraft missiles, probably enough to shoot down all the planes on Earth because they were afraid of getting bombed. This is why they won't run out in the Ukraine war and even use them against ground targets.
  - deleted 4y ago
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- p_l 4y ago
  Similarly, I've heard opinions attributed to Gorbachev that the thing that really broke the system was costs of Chornobyl cleanup. Another thing usually missed in the "West" is that Soviet Union pretty much never stopped being in crash industrialization mode due to how poor its starting position was.

tqi 4y ago

> 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. If few buyers are brave enough to buy local government bonds under these conditions, even fewer buyers can muster enough courage to buy corporate bonds. Can someone explain this part? While the knock-on effect on other municipal bonds makes sense, I would have expected this to make corporate bonds more attractive since the demand would have shifted?

legitster 4y ago
If you are buying government bonds, it means you are really risk averse. Cash is probably a better option to you.
- snikeris 4y ago
  Not necessarily. Some people buy 30 year treasuries specifically because they are more volatile than shorter duration bonds.

rsj_hn 4y ago

I upvoted this story because it was interesting and fun to read, but there are a few problems with the article. 1. The author makes it seem like South Korea's credit problems are due to LegoLand announcement, rather than the global crisis of high inflation forcing governments to raise interest rates, causing projects to go bust all over. It's not clear how much of this was caused by Legoland and how much Legoland is just an example of bond market troubles after an unprecedented period of low rates that created unrealistic investor expectations of risk, and the subsequent repricing when rates start to go up. E.g. municipal debt should never be priced the same as federal government debt, because the Federal government is a currency issuer with a central bank, whereas the municipal government is a currency user, and there is nothing wrong with a project backed by a local government from declaring bankruptcy -- investors should not price that at zero risk. 2. The author (who is a lawyer, not an economist) believes that a reduction of new housing causes real estate values to fall, rather than increase. 3. The belief that high interest rates are designed to reduce "liquidity" and that therefore emergency liquidity measures somehow contradict a policy of rate hikes. Here I will rant a bit. Use of "liquidity" in financial journalism is usually a red flag as most reporters don't understand it. They think it means "money". They view the market as a big bag in which the government dumps money when it lowers rates, or removes money from the bag when rates go up. You see similar reporting on the stock market, which they also view as a big bag in which investors pour money in or remove money out -- forgetting that in a stock exchange, for every buyer there is a seller. Bottom line, money going into or out of a bag is generally the only mental model available in financial journalism. There are exceptions, but you see it everywhere and it drives me crazy. This is why the author believes it's a contradiction and irony that the South Korean government would announce emergency lending facilities even as it raises rates. But what liquidity refers to is how quickly/efficiently can you convert something into cash. For example, a liquidity crisis in the bond market means that you can't use the bond as collateral for cash loans. Bonds becoming discounted more is not a reduction in liquidity, it just means the bonds are worth less because interest rates are higher. But as long as you can use them for collateral according to their expected value, then the bond market remains "liquid" regardless of the interest rate. When liquidity is threatened, the central bank steps in and says "We will accept these bonds as collateral for cash loans". Note that the central bank is still applying the policy discount rate, which may be high. In this article, several large banks banded together to make this announcement as well - that they would accept bonds as collateral for loans. Such a step has nothing to do with rate hikes, and does not undermine the rate hike program, it only undermines the bag-of-liquidity metaphor. No government raises interest rates to reduce liquidity or lowers rates to increase liquidity, rate hikes are done to manage inflation and/or foreign exchange rates, whereas the tools to manage liquidity are discount windows, swap lines, and emergency lending facilities. They are separate tools with separate macroeconomic targets.

legitster 4y ago

Wow. All over a tiny $150 million dollar bond. A good reminder how we take for granted systems that are stable. When often time they are only stable because of vigilance.

HWR_14 4y ago
No, all over interest payments for 4 months on a $150 MM bond. So, even at 12% APR, $6 MM. But it became unstable because it suddenly made government bonds suspect. Like, if the US Treasury announced it was just not going to pay back a $1MM bond issue, the US and world markets would tank. Size is irrelevant.
- mjevans 4y ago
  Trust is priceless, as in irreplaceable. It's exactly why the laws should, maybe not make it impossible, but require a very high bar be crossed to do the sort of actions that breach that trust. As an example. The US debt ceiling thing, it really should be the reverse. It should take a 'super majority' of congress voting against raising that ceiling to limit it, even if it's an agenda item automatically included in each session's docket.

GauntletWizard 4y ago

I'm headed to Korea in a week, and my main takeaway from this is that I am considering going and checking out this boondoggle instead of Lotte World

anm89 4y ago
I strongly recommend this. Lotte world is ultra over rated. Go explore the country side. Endless cool stuff out there.
- pigtailgirl 4y ago
  -- Lotte world is pretty fun if you're already staying in Seoul and want to visit amusement park - if lover of amusement parks tho - E-World in Daegu = a lot of fun - tho Daegu is a boring city generally - but - Chuncheon is super easy to get to - the dakgalbi there is actually much better --
  - anm89 4y ago
    I love dalkgalbi!
  - GauntletWizard 4y ago
    I'm mostly going to be in Seoul but I have plans for a weekend in Busan; Maybe I'll catch an early train to Daegu, stay there for a night and then onwards to Busan.

0x4d464d48 4y ago

Dear lord! Talk about an own goal...

627467 4y ago

Sit tight for many such events. The world is living in a hangover of cheap credit and money for too long. Governments don't know how to govern without this anymore.

leemailll 4y ago

It's unbelievable the new governor cause such a turmoil on the financial market over less than 0.1% of the annual budget. Though the article said nothing about the possible causes of the move, but it is hard to believe he or any of his party didn't foresee the disaster

ilyt 4y ago
There are plenty of morons that also happen to be charismatic enough to be picked in political role, that's entirely unsurprising

microtherion 4y ago

If you had "recession due to economy stepping on a LEGO" on your bingo cards for 2022, you may win.

giggyhack 4y ago

> The far-right politician is not known for his economic erudition, as he gained notoriety by being the standard-bearer for impeached President Park Geun-hye and claiming that the 1980 Gwangju Uprising, in which South Korea’s dictatorship massacred thousands of pro-democracy protesters, was a North Korean insurrection. So he acts on gut instinct alone, without listening to expert advisors, and uses propaganda and fake news tactics to win supporters. Sounds a lot like several major ousted dictators. Reap what you sow, SK. I hope you see through this BS quickly.

ErikVandeWater 4y ago
>> The far-right politician is not known for his economic erudition, as he gained notoriety by being the standard-bearer for impeached President Park Geun-hye and claiming that the 1980 Gwangju Uprising, in which South Korea’s dictatorship massacred thousands of pro-democracy protesters, was a North Korean insurrection. > So he acts on gut instinct alone, without listening to expert advisors This statement is not supported in your quote, or in the article. One can listen and disagree.
- isitmadeofglass 4y ago
  Are you suggesting that experts advices that they should default on A1 bonds even though they could clearly manage to extend and pay them? That seems highly unlikely. I don’t think any expert in the field would have such disregard for the importance of trust in the system.

boringg 4y ago

Amazing. Tl, Dr: Uneducated but confident man gets power tanks economy for politics and not understanding the basics of finance (or listening to other people smarter then him). Honestly whats happening to this world.

tokai 4y ago

>The same lesson applies to Britain, South Korea, and everywhere: Electing bad politicians leads to a bad economy. But Truss wasn't elected (by the voters of UK).

LatteLazy 4y ago
People did elect Johnson and May though...