Project finance time bomb must be dismantled

Growing concerns surround the potential detonation of the real property project finance sector, deemed a financial market “detonator,” with the looming risk of explosion in the coming year. Credit rating industry estimates indicate that as much as half of the initial 30 trillion won of “bridge loan” for land purchase and project commencement may incur accounting losses. In response, the financial authority is conducting relay meetings with major financial entities to mitigate this risk.

As of the end of June, the project finance loan balance reached 133.1 trillion won, an increase of 1.5 trillion won from March, as reported by financial authorities. The default rates for securities firms and savings banks have surged to 17.28 percent and tripled, respectively, within a year. Unlike the 2008 financial crisis, the failure is now permeating nonmonetary institutions.

The crux of the issue lies in maturing bridge loans, most due next year. Businesses that took short-term, high-interest loans for land purchase now face challenges due to rising construction costs and real estate market stagnation, leading to potential mass failures, especially among small and medium-sized securities firms and savings banks. The prospect of serial bankruptcies among construction firms due to credit crunch is also alarming.

Despite last year’s Legoland crisis and a subsequent government subsidy of over 50 trillion won, the project finance market remains unstable, reliant on financial authorities’ assistance. Extending loan maturity expectations to coincide with the anticipated end of interest rate hikes and real estate market recovery has proven insufficient due to prolonged high interest rates.

Retaining loan maturity delays may accumulate interest rate burdens, worsening insolvency. Timely resolution of insolvent businesses is crucial to releasing land into the market at affordable prices and ensuring a smooth housing supply. Impartial project evaluations are necessary to systematically eliminate insolvent businesses, akin to deflating a balloon. Preemptive and orderly reorganization is necessary to prevent the spillage of project finance insolvency into the broader finance and real economy.