Korean Won Falls Most Since 1997, Stocks Drop on S&P Warning

By Kim Kyoungwha and Saeromi Shin

Oct. 16 (Bloomberg) -- South Korea's won slumped by the most since the International Monetary Fund bailed the nation out in 1997, after Standard & Poor's said banks may struggle to refinance their debt.

The Kospi stock index tumbled as much as 9.3 percent, the biggest drop since September 2001, as S&P said it may cut credit ratings for Kookmin Bank and six other financial companies. The cost of protecting South Korean government debt from default rose. The won fell 9.7 percent to 1,373 per dollar as of the 3 p.m. close, Seoul Money Brokerage Services Ltd. said. The currency's 32 percent slump this year threatens to increase the cost of financing dollar-denominated debt.

``Concerns about banks are at the heart of these sell- offs,'' said Kim Eun Soo, head of equities at PCA Investment Trust Management Co., which manages the equivalent of $1.9 billion in equities in Seoul. ``The S&P news was just a warning, but it leaves open the possibility of downgrades on domestic financial institutions.''

The slump in stocks and the won increased pressure on policy makers to provide finance companies with emergency funding, following similar actions by Europe, Japan and Australia. S&P, in a report released yesterday, said Korean banks face a more than 50 percent chance that the global credit crunch could threaten their foreign-currency funding.

Declines in the country's equities and currency echo similar slumps in emerging markets worldwide as the financial turmoil prompts investors to avoid assets in more risky markets. The MSCI Emerging Market Index has tumbled 53 percent in 2008.

Overseas Sellers

Overseas investors have sold a net 31 trillion won ($23 billion) of South Korean stocks this year, including 636 billion won today.

South Korea's short-term external debt has almost tripled to $175.65 billion as of June 30 from the end of 2005 as exporters locked in dollar rates for their overseas earnings and local banks borrowed to meet those commitments. The nation required a $57 billion IMF loan during the Asian financial crisis to repay overseas debt used for investment and construction projects.

The country has been building up its currency reserves since the crisis led to the won halving in value in 1997. Foreign-exchange reserves dropped in each of the last six months, sliding $24.6 billion to $239.7 billion as policy makers intervened to stem the won's slide. Central banks buy or sell overseas currencies to influence exchange rates.

South Korea plans to sell as much as $5 billion in foreign- currency stabilization bonds next year, a finance ministry official, who declined to be named, said today.

`Most Vulnerable'

``The government will have to take some kind of measure in line with other countries if it wants to arrest overseas investors' concerns,'' said Kim Sung Kwang, who helps manage the equivalent of $1 billion at Hanwha Investment Trust Management Co. in Seoul. ``If the funding squeeze continues it will start affecting banks' fundamentals.''

Korea's short-term debt is equal to 76 percent of foreign reserves, which is ``the most vulnerable in Asia'' as the nation's current-account deficit widens, Brown Brothers Harriman & Co.'s strategist Win Thin wrote in a note to clients. The ratio topped 250 percent back during the 1997-98 crisis.

The cost of protecting South Korea's external debt from default rose, according to traders of credit-default swaps. Five-year contracts on that debt were quoted 40 basis points higher at 330, according to data from ICAP Plc. The price, which rises as perceptions of credit quality fall, is equivalent to $330,000 annually to protect $10 million in debt.

Program Trading

The Kospi dropped 9.4 percent to 1,213.78, with financial stocks contributing the most to the decline. KB Financial Group Inc., the holding company for Kookmin Bank, slumped 15 percent to 43,400 won. A downgrade by S&P would be the first for Kookmin since 1999. Woori Finance Holdings Co., which controls Woori Bank, plunged 15 percent to 11,050 won.

South Korea's stock exchange halted program trading of Kospi shares for five minutes after the futures on the index plunged. The futures lost 6.7 percent.

Overseas financial institutions including HSBC Holdings Plc, Deutsche Bank AG and JPMorgan Chase & Co. are reducing their credit lines for South Korean banks, the Seoul Economic Daily reported, citing financial industry officials it didn't name.

Korea's money markets are also showing ``signs of stress'' as funding for banks remains challenging, Morgan Stanley's analyst Linan Liu in Hong Kong wrote in a report yesterday.

Money Market Worries

The rate on 91-day certificate of deposits, a key money market rate in Korea, rose to 6.05 percent, the highest level since January 2001. The spread between bonds issued by banks and government debt with maturities of one to three years, a measure of credit risk for banks in local currency terms, has widened to the most since 2000, Liu said.

``Money is not circulating smoothly enough, and that worries investors,'' said Kim Young Il, head of equities at Korea Investment Trust Management Co. in Seoul, which manages the equivalent of $6.5 billion in equities.

Korea's local-currency bonds fell, ending a seven-day run of gains that was spurred by investors seeking the relative safety of government debt. The yield on the 5.5 percent note due June 2011 rose 2 basis points to 5.20 percent, according to Korea Exchange. The price fell 0.05, or 5 won per 10,000 won face amount, to 102.64. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net.