Kim Says Fears of South Korea Crisis Are `Groundless'

By Seyoon Kim
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Sept. 2 (Bloomberg) -- Fears that South Korea is facing a financial crisis are ``groundless,'' Vice Finance Minister Kim Dong Soo said after a government meeting called in response to the slump in stocks, bonds and the currency.

The won gained 0.2 percent at 9:47 a.m. in Seoul after weakening below 1,100 a dollar yesterday for the first time in almost four years. The Kospi index rose 0.4 percent after plunging 4.1 percent yesterday to the lowest since March 2007. Kim vowed today to take ``stern action'' on the won's excessive drop, and said the government may reduce bond issuance if needed.

South Korea's currency has slumped almost 17 percent this year, Asia's worst performer, as price increases and a slowing economy prompted bond and stock funds to move money out of the country. Authorities have spent billions of dollars in reserves attempting to shore up the won after its drop stoked the fastest inflation in 10 years, threatening the economy's expansion.

``A major financial crisis is highly unlikely,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``The financial sector is in good health. The economy has become more flexible in dealing with shocks, and the authorities have plenty of room for macro policy to respond.''

The won declined more than 7 percent in August, the biggest monthly drop since the Asian financial crisis in a decade ago that drove the nation to the brink of default.

`Deeply Worried'

``The government is deeply worried about the won's drop, which has moved beyond fundamental reasons,'' said Kim, who chaired today's meeting in Gwacheon. ``Investors should have no doubt about our ability to counter the movement.''

The nation's foreign-exchange reserves fell for a fifth month in August to $243.2 billion, the central bank said today. South Korea has amassed foreign currency since the region's crisis in 1997-1998and is now the world's sixth-largest holder of reserves.

The $970 billion economy is in its 10th year of expansion. The nation's financial institutions are sound, Rhee Chang Yong, vice chairman of the financial regulator, told reporters after the meeting.

``The rumor about a crisis is groundless, but we plan to strengthen monitoring in case external conditions deteriorate quickly due to an expansion of a global credit crunch,'' Vice Minister Kim said.

1997 Crisis

Reserves plunged by as much as $22 billion to $7.3 billion in November 1997 from the end of 1996 as the government made an unsuccessful attempt to prop up the exchange rate after an exodus of foreign investors triggered by the collapse in Thailand's baht. The government was forced to turn to the International Monetary Fund for $57 billion of loans to help businesses repay overseas debt. The won slumped 46 percent in the final three months of the year.

The Bank of Korea said last week it's watching moves by offshore investors in the bond market, after foreigners turned to net sellers of Korean debt in June and July, raising concern that capital outflows will drive down the won further.

International investors sold a record 25 trillion won ($22 billion) more Korean shares than they bought this year, stock exchange data shows. The Kospi stock index fell 25 percent.

``Markets are overreacting to rumors about a possible financial crisis, which is very unlikely to happen,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul.

``It's better than doing nothing for the government to say something to calm the markets down,'' he said. ``Authorities will continue to intervene in the currency market to support the won, and the question is how aggressively they will do so.''

The economy, Asia's fourth largest, expanded 4.8 percent last quarter from a year earlier, the weakest pace in more than a year. Confidence among consumers in July fell to the lowest since 2000 and spending by households, saddled with record debt, dropped in the second quarter for the first time in four years.

To contact the reporter for this story: Seyoon Kim in Seoul at skim7@bloomberg.net