By Jack Kim and Cheon Jong-woo
SEOUL, Oct 21 (Reuters) - South Korea on Tuesday said it would spend about $4 billion to prop up its wilting construction industry, the second major package this week as it grapples with the impact of the global financial storm on its economy.
President Lee Myung-bak said the credit crunch around the world made South Korea's economic situation even more grave than the Asian financial crisis a decade ago, which pushed the country to the edge of default.
"The overall situation is more serious than the 1997 crisis. Back then it was an Asian crisis but today the entire world economy is at risk," a presidential spokesman quoted Lee as saying during a cabinet meeting.
"It's not like any recovery of our own means we will have escaped the effects of the (global) crisis," Lee said.
The latest package, which follows Sunday's $130 billion rescue for the credit-squeezed financial system, will allocate over 5 trillion won ($3.8 billion) to the construction sector whose problems the government fears could ricochet through the slowing economy.
"It is feared troubles in sectors of the real economy, such as the construction industry, could make things worse in the financial sector as well," the government said in a statement.
The money will be used to buy unsold new homes and land from domestic builders who want to pay off debt.
"(The steps) are intended to help ease the tax and financial burden on households while boosting demand for homes ... (The government) aims to offer financial support to construction firms on condition that they also make efforts at self-rescue."
Analysts welcomed the move, but held out little hope for demand in the ailing Korean property sector.
"It will obviously help the sentiment after all the scary rumours about how even major construction firms are in trouble," said Lee Kwang-soo, an analyst at Tong Yang Inv Bank. "But the benefits are overshadowed by risks from the macroeconomic fundamentals, such as financial sector troubles and interest rate burdens."
The fourth biggest economy in Asia has looked especially exposed to the financial turmoil, prompting the government on Sunday to rush to the rescue of its financial system whose strength is being sapped by a shortage of liquidity and the prospect of weaker economic growth next year.
South Korea's financial markets appeared to regain their composure after some of the most volatile price swings in a decade, but returned to the downward trend as investors started looking ahead to a prolonged period of economic gloom.
Seoul's main share index closed above recent three-year lows, but 1 percent lower for the day at 1,196.10 points. The won, one of Asia's worst hit currencies with a fall of around 30 percent so far this year, also finished local trading slightly lower at 1,320.0/0/.4 per dollar, even as local authorities were spotted selling dollars to help the won.
UNWANTED HOMES
Promising 2 trillion won for unwanted homes and the other 3 trillion for land purchases, the government said state-run credit guarantee agencies would help builders sell bonds more easily by providing credit guarantees. It may also ease rules on home-backed loans in the greater Seoul area next month.
The moves fell short of some media expectations for a 12 trillion won injection into the building industry, which is heavily indebted to South Korea's banks.
"Yes the amount did come out smaller than the media had reported, but that does not worry us," said Kang Seung-min, analyst at NH Investment & Securities.
"What the builders needed the most was easier financial regulations on real estate transactions and it was sort of granted as it hinted at easing restrictions in home-backed loans in greater Seoul area," he added.
The government opened the taps on the loan guarantees, spreading out the promised $100 billion worth among 18 local banks, including state-owned Korea Development Bank and Woori Bank [ID:nSEO337807].
Also making good on promises to ensure liquidity in South Korean financial markets the central bank said it had provided $1.52 billion out of a planned $2.5 billion in in three month swap deals to local banks.
The Bank of Korea said last week it would supply dollars into the local swap market to help ease persistent dollar-funding shortages amid the global financial crisis. (Additional reporting by Yoo Choonsik, Rhee So-eui and Park Jung-youn; writing by Keiron Henderson, editing by Jonathan Thatcher and Tomasz Janowski)
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