Oct 18, 2008 <br /> S. Korea braces for fallout <!--10 min--> <br /> It may be the most vulnerable Asian economy. <table border="0" cellpadding="0" cellspacing="0" width="100%"><tbody> <tr> </tr><!-- headline one : start --> <tr> </tr><!-- headline one : end --> <tr> </tr><!-- show image if available --> <tr valign="bottom"> <td width="330"> <img src="http://www.straitstimes.com/STI/STIMEDIA/image/20081018/crisis-korea-reuters.jpg" border="0" /> <br /> </td> <td width="10"> <img src="http://www.straitstimes.com/STI/STIMEDIA/common/c.gif" border="0" /> </td> <td valign="bottom"> <img src="http://www.straitstimes.com/STI/STIMEDIA/common/c.gif" border="0" /> <br /> 'Korea's foreign exchange reserves amount to US$240 billion (S$355 billion), all of which are readily available at anytime,' President Lee Myung Bak told the nation in a radio address on Monday. That figure was 27 times larger than when the Asian financial crisis hit the country in 1997, he said. -- PHOTO: REUTERS <br /> </td> </tr></tbody> </table> <br /> <br /> <br /> <br /> <br /> <!-- START OF : div id="storytext"-->SEOUL - AS FINANCIAL turmoil spreads around the world, South Korea may prove to be one of the most vulnerable countries in Asia. <br /> With its banks facing potential trouble, its currency and stocks reeling and consumer debt on the rise, the country's woes have stirred memories of the regional economic crisis that struck it more than a decade ago. <br /> Now, amid criticism that officials have done too little too late, government leaders are racing to restore confidence in the country's economy. <br /> On Friday, the government held an emergency meeting to discuss how best to respond to the market turmoil. In recent days, officials have sought to reassure their fellow citizens that another collapse isn't in the making. <br /> 'Korea's foreign exchange reserves amount to US$240 billion (S$355 billion), all of which are readily available at anytime,' President Lee Myung Bak told the nation in a radio address on Monday. That figure was 27 times larger than when the Asian financial crisis hit the country in 1997, he said. <br /> Currency reserves can be wielded for varied purposes, including to defend the value of a country's currency and generally shore up the financial system. <br /> Despite Mr Lee's reassuring words, some analysts have sounded alarms about South Korea, most notably its banks. <br /> They say the global credit crunch is making it hard for local banks to acquire dollars and other foreign currency needed to refinance activities such as foreign-denominated loans to domestic companies and cite personal debt levels as a cause for worry. <br /> Also, the country's broadest measure of trade - the current account - is expected to record an annual deficit for the first time in a decade, meaning South Korea is spending more on goods, services and investments from overseas than it sells abroad. <br /> South Korean stocks have been no exception to the worldwide rout in equities spurred by the US credit meltdown, falling 38 per cent this year. They had already dropped 22 per cent even before the collapse last month of Lehman Brothers Holdings. South Korea's currency was also having a bad 2008 even before declines against the US dollar accelerated amid the crisis. The won has plummeted almost 30 per cent this year against the dollar and had its worst single day - a drop of 9.7 per cent on Thursday - since Dec 31, 1997. <br /> 'Ongoing stress in the Korean financial market seems to be a mixture of domestic credit crisis, balance of payment crisis and global credit crisis,' Citibank Korea economist Oh Suk Tae wrote in a report last week. <br /> Standard & Poor's Ratings Services said this week it may downgrade the credit ratings on some of South Korea's biggest banks, citing 'a more than 50 per cent chance that the global liquidity squeeze could threaten Korean banks' foreign currency funding.' <br /> 'We expect the stress on the Korean financial system to be prolonged,' S&P analyst Kim Eng Tan said on Friday. <br /> South Korea, where consumer debt levels soared in 2003 after the government encouraged credit card use to spur the economy, has again been seeing rising levels of personal red ink. <br /> National Information & Credit Evaluation, a credit information provider, said in its quarterly magazine that an index monitoring South Korean household debt was at 75.1 in June, down from 87.2 the year before. A reading below 80 implies 'caution required.' <br /> Some analysts, such as Mr Alaistair Chan of Moody's.com, call 'overblown' any fears that South Korea could fall into a full-fledged meltdown such as the 1997-98 Asian contagion, citing its 'vast foreign reserves'. <br /> Those reserves, while indeed formidable, have been falling as the Bank of Korea, the central bank, is believed to have been using them to try and stem the won's declines by purchasing dollars. <br /> S&P expressed disappointment on Wednesday that 'no wide-scale government measure has been announced' such as 'blanket deposit guarantees and underwriting of interbank lending risks' implemented in other countries. <br /> Minister of Strategy and Finance Kang Man Soo said on Friday after the special meeting that the government would announce what he called 'pre-emptive, decisive and sufficient' measures on Sunday. <br /> The government has maintained that its banks are healthy and says the country's situation is not dire. <br /> 'Korea's banking sector is sound in terms of asset strength, capital adequacy, profitability, and other soundness measures,' the Financial Supervisory Service said last week. <br /> Besides its hefty foreign currency reserves - the world's sixth largest - the government says other factors are in its favour such as manageable corporate debt levels and an expected turnaround in itscurrent account deficit as early as this month. <br /> Goldman Sachs economist Kwon Goohoon says South Korea's accumulated budget surpluses since 2000, low public debt and sharply falling commodity prices are all pluses. <br /> Nevertheless, he expects the economy to slow to annual growth of 3.9 per cent next year, the lowest since 2003. <br /> Mr Tom Byrne, a senior vice-president and regional credit officer with Moody's Sovereign Risk Group, said on Friday that South Korean banks were under 'severe pressure', but expressed confidence the government's reserves were adequate. 'At the same time, the unprecedented turmoil in the global financial system makes seeing through this exceptional crisis, let alone the expected downturn in the economic cycle, very difficult,' he said. -- AP
S. Korea Backs $100 Billion in Debt to Calm Markets (Update1) By Kyung Bok Cho and William Sim Oct. 19 (Bloomberg) -- South Korea will guarantee as much as $100 billion in bank debts and supply lenders with dollars to stabilize the financial markets. The government will also provide 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 heads of the nation's finance ministry, central bank and financial regulator said today in a joint statement from Seoul. Policy makers had held an emergency meeting on Oct. 17 to hammer out the plan. South Korea is struggling with Asia's worst-performing currency, a shortage of U.S. dollars and a stock market that has lost 38 percent this year. The guarantee on bank debts comes after Standard & Poor's said last week it may cut the credit ratings of the nation's largest lenders, which triggered the worst plunge in the won since the International Monetary Fund bailed the nation out in December 1997. ``They have to do that because the market was pushing them by attacking the Korean won,'' said V. Anantha-Nageswaran, chief investment officer for Asia Pacific at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager for the wealthy. ``They know what the stakes are. The currency could completely careen out of proportion.'' The government and state-run lenders including Korea Development Bank will guarantee the external debt taken up by Korean banks from Oct. 20 to June 30 next year, according to today's statement. The guarantee is valid for three years. `Allay Fears' 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. ``We will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market,'' Finance Minister Kang Man Soo told reporters in Seoul today, at a joint press briefing with central bank Governor Lee Seong Tae and Jun Kwang Woo, head of the Financial Services Commission. S&P, in a report released Oct. 15, said South Korea's banks face a more than 50 percent chance the credit crunch could threaten their foreign-currency funding. Domestic lenders have $235.3 billion of foreign-currency liabilities, with about $32.7 billion due to mature in the fourth quarter, according to the Financial Supervisory Service. Funding Loans ``Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans,'' Moody's Investors Service said in an Oct. 16 report. That's forced them to rely on the wholesale market for about 44 percent of their total funding, with international markets accounting for as much as 12 percent, the ratings company said. Moody's had earlier reduced the outlook on its financial strength ratings on Kookmin Bank, Woori Bank, Shinhan Bank and Hana Bank. To boost the supply of U.S. dollars in the domestic market, South Korea will provide the banking industry with $30 billion from its foreign-exchange reserves, according to the statement. The government had already promised to supply a total of $15 billion to small firms and the swap market, while the Bank of Korea said on Oct. 17 it will change rules in the foreign- exchange swap market to increase banks' access to funds. The U.S. financial crisis is making it more difficult for companies worldwide to secure dollars as banks hoard cash to meet their future funding needs. South Korea's currency and swap markets are experiencing a dollar shortage as local businesses, which expect the U.S. currency to strengthen against the won, don't want to sell their dollars yet. `Smoothing' Operations Authorities will continue ``smoothing'' operations in the currency market to avoid ``extreme volatilities,'' they said in the statement. The government will give tax benefits to investors who hold equity or corporate-bond funds for more than three years to encourage long-term investing and stabilize the markets, today's statement said. The breaks include an exemption from taxes on dividends. South Korea's benchmark Kospi stock index has lost 38 percent this year, heading for its first annual decline since 2002. The measure plunged 9.4 percent on Oct. 16, the biggest one-day fall since September 2001. In U.S. dollar terms, the nation's stocks are Asia's third- worst performers in this year, after China and Vietnam, because of the won's decline. South Korea's financial regulator placed a temporary ban on short selling last month while making it harder for investors to borrow stocks to bet on stock-price declines, echoing measures taken by authorities in nations including the U.S. and Australia. Further Steps? South Korea will inject 1 trillion won ($767 million) in Industrial Bank of Korea, the nation's biggest lender to small- and mid-sized businesses, by transferring its equity stakes in the state companies. Separately, policy makers have decided that a recapitalization of the nation's financial institutions or an expansion of deposit guarantees are ``not necessary.'' Still, the government will ``take proper actions'' should the need arise, according to the statement. ``The government has done what it can do at the moment to join global efforts to help stabilize the markets,'' said Seo Chul Soo, a fixed-income analyst at Daewoo Securities Co. in Seoul. ``More steps may be needed if the global markets remain unstable.'' http://www.bloomberg.com/apps/news?pid=20601087&sid=aslEiABV3pgc&refer=home