Jitters over a run on the Korean Federation of Community Credit Cooperatives, also known as MG Community Credit Cooperatives, are showing signs of calming down. Withdrawals subsided and many of those who rushed to withdraw savings are redepositing them.

According to an inter-agency response team, deposit withdrawals from KFCC turned to a downward trend on July 7. They shrank about 1 trillion won ($765 million) from a day earlier.

Demand for deposit withdrawal came to a lull about 10 days after it began to increase on the news that KFCC's delinquency rate soared to 6.18 percent late last month.

The government's promise to guarantee all deposits at KFCC seems to have worked.

It said on July 6 that it can afford to guarantee deposit amounts in excess of 50 million won per customer, which is the limit of deposit covered by Korea Deposit Insurance Corp.

The government also announced a policy to keep providing tax-exemption benefits if KFCC customers who terminated tax-free savings contracts from July 1-6 redeposit them until July 14.

Then KFCC received about 3,000 redeposit applications on July 7. They are said to amount to some 100 billion won.

The government responses worked to some extent to get things under control for now, but it is too early to relax. They are a quick fix far from fundamental solutions. Doubt about the financial sustainability of KFCC has not disappeared altogether.

The biggest problem lies in loans for real estate project finance.

KFCC's delinquency rate almost doubled for six months from late last year. Particularly the figure for loans to companies, most of them given for real estate project finance, was nearly 10 percent.

Nonperforming loans for real estate projects are the root cause of a run on KFCC and a potential detonator of crisis in the financial circle. Not only KFCC but also nonbank financial institutions are overexposed to real estate project financing.

This is a consequence of an indomitable belief that a building, only if constructed, will make money no matter where it is.

In the circle of nonbank financial institutions, the overall delinquency rate for real estate project finance loans almost doubled from 1.19 percent late last year to 2.01 percent at the end of the first quarter. The figure for securities firms was as high as 15.88 percent, and that for savings banks 4.07 percent in late March.

If builders who took out project finance loans go bankrupt, related multiple lenders' solvency will worsen rapidly. A similar bank run to one on KFCC may happen. The Financial Supervisory Service said in April that it will intensively manage 500 of about 3,600 real estate project sites across the country that received loans. This means that hundreds of project finance sites funded by loans are at the risk of defaulting.

Domestic interest rates are forecast to remain high for a while. Recently the real estate market bounced partially but within a bigger frame, it is still bearish.

If this situation goes on, the weakest link in a chain of project financing will likely be the first to be broken.

In a stagnant real estate market, it looks unavoidable for some small and mid-sized construction companies to experience a liquidity crunch. If they fail to repay project finance loans in time, the health of related financial institutions will deteriorate in tandem.

KFCC might be the weakest broken link. The government must try hard to prevent a chain reaction of insolvency beginning with default on real estate project finance loans. It needs to activate programs to dispose of nonperforming loans and induce financial institutions into increasing their allowance for bad debts. The government must make full preparations to close off nonperforming loans for real estate projects from the financial circle.