The outlook was rosy in May when a local Legoland theme park opened in Chuncheon, Gangwon Province. Around 2 million visitors were expected to visit the new attraction each year, creating growth momentum and new jobs in the region.

As the initial phase of excitement passed, the number of visitors, which hit a peak of 130,000 in May, began to drop to around 100,000 in June and then 70,000 in July.

But Legoland’s flash-in-the-pan popularity is nothing compared with what has followed in connection with the country’s financial market in general and the municipal government in particular.

The construction of the theme park, fraught with multiple delays and frictions over capital investment, is a joint project between a local developer backed by the Gangwon municipal government and Merlin Entertainments, a United Kingdom-based attractions operator.

Policymakers and investors alike were alarmed late last month when Iwon Jeil Cha, a special purpose company established by the Gangwon Jungdo Development, defaulted on the provincial-government-guaranteed asset-backed commercial paper (ABCP) worth 205 billion won ($143 million) raised to fund the construction of Legoland. Early this month, it was declared bankrupt.

This came as a shock, since the default was declared even though Gangwon Province guaranteed the short-term borrowing.

As a result, jitters have spread through the domestic financial market, amid mounting concerns about a possible chain reaction that could drag other cash-strapped financial firms under.

Ten securities firms and one fund management company are exposed to the defaulted ABCP. Despite soaring worries, the municipal government argued that it could pay back the debt if Iwon Jeil Cha took contingency steps. In this regard, Kim Jin-tae, governor of Gangwon Province, said he would take the company into court receivership and resolve the liability issue with the help of a local budget by the end of this year.

But the financial market interpreted the debt default as a serious sign of broader problems ahead, which in turn raised bond yields drastically and nearly paralyzed the ABCP sector.

More worrisome is that financial firms are beginning to refuse to roll over some municipal asset-backed securities or are shortening maturity timelines to reduce their exposure to risks.

If the bond market remains beset by such uncertainty, companies could see their liquidity situations worsen at a rapid pace, and eventually some financially vulnerable firms could go bankrupt.

The ominous sign of a credit crunch comes at a time when the country’s real estate market is cooling amid rising interest rates. The shock waves from the troubled Legoland project are not only complicating the credit market but also threatening to spill over into other economic sectors.

Noticing the explosive power of the spreading credit risks, Finance Minister Choo Kyung-ho held an emergency meeting Sunday and said the government would expand liquidity facilities to buy corporate bonds and commercial paper to prevent spillover effects.

Choo unveiled a plan to earmark at least 50 trillion won to tackle a liquidity crunch and calm the jumpy debt market.

Such measures are certainly expected to soften the impact from the Legoland-linked credit crunch, but it is no time to heave a sigh of relief yet. With the real estate market slump, outstanding debt based on real estate project financing is estimated to stand at 112 trillion won as of June. If asset-backed securities issued by brokerages are included, the figure reaches as high as 152 trillion won -- a vast amount of debt that could add to risks for the local financial market.

The government should step up monitoring of the volatile market situations and get ready to take prompt measures to prevent the credit crunch from developing further, particularly in the real estate sector.