South Korea Bank Aid Helps Weather Turmoil, S&P, Moody's Say

By William Sim and Bomi Lim

Oct. 21 (Bloomberg) -- South Korea's $130 billion financial- aid package will improve banks' ability to arrange overseas loans and help the nation avert a repeat of the 1997 financial crisis, the three main ratings companies said.

Moody's Investors Service and Fitch Ratings affirmed South Korea's sovereign credit ratings today. Standard & Poor's, which last week sparked the won's biggest one-day drop since 1997 by placing the five biggest banks on review for a rating cut, said the bank plan is more ``swift and broad'' than expected.

Shares of South Korea's four-biggest banks rose for a second day after the government Oct. 19 pledged to guarantee $100 billion of lenders' offshore debt and provide $30 billion in U.S. dollars to banks. The government today said it will buy $1.5 billion of residential projects from builders after the backlog of unsold homes reached the highest in a decade.

``The possibility of a full-blown crisis in Korea, as the markets had increasingly priced in prior to the government's announcement, is remote,'' said Alvin Pontoh, an economist at Capital Economics Ltd. in London. ``That said, the package will do little to prevent the Korean economy from slowing sharply.''

Fitch kept South Korea's foreign-currency debt rating at A+, the fifth highest of 10 investment grades, saying the $130 billion package for banks is ``sufficiently focused and affordable.''

The measures will ``help alleviate pressures affecting South Korean banks,'' Moody's said, adding the nation's A2 debt rating is appropriate.

Korea Not in Jeopardy

``The solvency of the Korean system is not currently in jeopardy,'' Tom Byrne, senior vice president at Moody's in Singapore said in a statement. ``Korea's credit fundamentals will most likely not be swamped as they were in the financial crisis of 1997.''

KB Financial Group Inc., which owns Kookmin Bank, climbed rose 2.4 percent in Seoul trading. Woori Finance Holdings Co. gained 2 percent, Shinhan Financial Group Co. added 1.8 percent and Hana Financial Group Inc. advanced 4.6 percent.

S&P last week placed the four banks, and Korea Exchange Bank, on review for a possible downgrade, saying they face a more than 50 percent chance the global credit freeze will threaten their foreign-currency funding.

``We will review the companies on CreditWatch when we see signs of improvement in their foreign-currency liquidity,'' Kwon Jae Min, a Hong Kong-based credit analyst at S&P, said in a phone interview today. ``We could remove them.''

Korean banks' external debt stood at $210.5 billion as of the end of June, according to government figures. Of the total, $145.5 billion is short-term, meaning it matures within a year.

Stocks, Won

The benchmark Kospi stock index declined 1 percent to 1,196.1 at the close of trading in Seoul, and the local currency fell 0.4 percent to 1,320.50 against the dollar on concern the government's plans won't be enough to avert an economic slowdown.

The Kospi has fallen 35 percent this year, and the won is down 30 percent, the worst performance among Asian currencies.

``Measures aimed at thawing the credit squeeze should now lead to economic stimulus packages,'' said Kim Young Il, head of equities at Korea Investment Trust Management Co. in Seoul, which manages the equivalent of $6.4 billion. ``Worries about the global economic slowdown and corporate earnings are still there.''

The economy expanded 4.8 percent in the second quarter, the slowest rate since early 2007, as households reduced spending for the first time in four years. Jobs growth cooled to the weakest pace in almost four years in September as the faltering economy prompted manufacturers and builders to eliminate workers.

President Lee Myung Bak said today the global credit crisis is worse than the Asian meltdown in 1997 when the won lost half its value and the nation had to turn to the International Monetary Fund for an emergency loan.

In 1997, ``the crisis was limited to Asia, but now the world's economy is falling into a slump,'' Lee said in Seoul, according to spokesman Lee Dong Kwan.

More Measures

South Korea joined Europe, Australia and Hong Kong in providing banks with state backing to ease a global lending drought. The nation's banks get as much as 12 percent of their funding from international markets, according to Moody's Investors Service.

``With the global credit crunch still unfolding, these measures are unlikely to be the last,'' Capital Economics' Pontoh said. ``Further measures could include additional liquidity injections or a lifting of the bank deposit guarantee ceiling from the current 50 million won.''

Fitch said the state backing for banks' overseas borrowings should make it easier for lenders to refinance loans on longer terms.

South Korea will guarantee local banks' new foreign debt taken out from yesterday to June 30, 2009r. The protection is valid for three years.

To contact the reporters on this story: Bomi Lim in Seoul at blim30@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net.