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Sydney, Oct 20, 2008 (ABN Newswire) - Struggling South Korea has further boosted its attempts to stabilise its weak currency and financial markets.
Two days after promising to cut taxes and boost spending, the country yesterday promised to guarantee as much as $US130 billion in bank debts and supply lenders with dollars to stabilize the financial markets.
The government said it would also introduce tax benefits for long-term equity and bond investors, while the Bank of Korea will buy repurchasing agreements and government bonds to boost won liquidity in the domestic markets.
The moves were outlined in Seoul yesterday in a joint statement from the country's finance ministry, central bank and financial regulator.
The statement followed a meeting Friday to discuss the moves.
That's when the plan to raise spending and cut taxes was outlined.
Kang Man-soo, finance minister, announcing the measures on Friday, also said the government would tackle a shortage of US dollars in the banking system.
The plan emerged after the summit at the presidential palace with Lee Seongtae, governor of the Bank of Korea, and Jun Kwang-woo, head of the Financial Services Commission.
After Friday's meeting, the government let it be known that a further announcement would come Sunday.
Observers said the moves follow attempts by other Asian nations including Japan, Malaysia and Pakistan on Friday to shore up their economies against the global crisis.
Pakistan is seeking assistance of up to $US4 billion by way of a loan from the World Bank. The country has sought help from Saudi Arabia without any noticeable show of help, while it received a pledge of support from China last week.
Japan's ruling Liberal Democratic Party has revealed that the Government is now willing to inject capital into the country's largest banks if necessary, as part of an economic stimulus package to be unveiled at the end of this month.
And Singapore and Malaysia on Friday announced blanket guarantees on bank deposits until December 2010, similar to the guarantee given for three years by Australia a week ago.
But the focus is in South Korea and its struggle to support the won, which has become the region's worst performing and weakest currency in the past two months.
The country is facing a shortage of US dollars and the stockmarket is off 38% this year. The won rose 3% Friday after a sharp 9.2% plunge on Thursday.
The guarantee on bank debts comes after ratings agency, Standard & Poor's said last week it may cut the credit ratings of seven of the country's leading financial groups, including its biggest banks.
The won fell in the wake of that warning and the country is now facing its biggest financial crisis since the Asian crisis 11 years ago when the country received a $US57 billion loan to stabilise the currency and the markets.
South Korea was broke then, this time it still has more than $US200 billion in foreign reserves and it is a matter of harnessing those to support the currency. But the country's domestic financial regulator says domestic lenders have $US235.3 billion of foreign-currency liabilities, with about $US32.7 billion due to mature in the current quarter.
That's why the government and state-run lenders including Korea Development Bank will guarantee the external debt taken up by Korean banks from today (October 20) to June 30 next year. The guarantee is valid for three years.
South Korea joins countries in Europe, along with Hong Kong and Australia, in providing state backing to debt that banks issue to fund lending amid a global financial crisis.
S&P said in its report last week that South Korea's banks face a more than 50% chance the credit crunch may threaten their foreign-currency funding while Moody's reckoned in a report, also issued late last week, that Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans and that's forced them to rely on the wholesale market for about 44% of their total funding, with international markets accounting for as much as 12%.
To meet the shortage of greenbacks in the domestic market, South Korea will provide the banking industry with $US30 billion from its foreign-exchange reserves.
The government has already promised to supply a total of $US15 billion to small firms and the swap market, while the central banks has said it will change rules in the foreign- exchange swap market to improve banks' access to funds.
The Government said it would also invest another one trillion won ($US750 million) into the state-funded Industrial Bank of Korea to help support cash-strapped small businesses.
South Korea's currency and swap markets are experiencing a dollar shortage as local businesses, which expect the US currency to strengthen against the won, won't sell their dollars.
The three authorities said there would be more "smoothing'' operations in the currency market to cut volatile movements in the won-US dollar rate.
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