South Korea Holds Emergency Summit to Stem Stock Rout

By William Sim and Bomi Lim

Oct. 17 (Bloomberg) -- South Korea's policy makers held an emergency summit today, seeking steps to restore confidence after shares plunged to a three-year low and the won declined by the most since the 1997 Asian crisis.

The Bank of Korea and the financial regulator will announce relief measures on Oct. 19 at 2 p.m. in Seoul, Finance Minister Kang Man Soo told reporters in Gwacheon today, declining to provide further details.

Standard & Poor's said the government should consider guaranteeing banks' debts, following similar moves in Australia, Europe and Hong Kong, to help lenders overcome difficulties obtaining offshore funding. Stocks plunged and money market rates soared to a seven-year high on concern banks will struggle to refinance maturing overseas debt, which could roil the financial system and wreck the economy's 10-year expansion.

``The government must take these steps to secure trust that our markets currently lack,'' said Shim Kyu Sun, a banking analyst at HI Investment & Securities Co. in Seoul. ``If we don't follow the global trend, we may see an outflow of capital to other markets.''

The government may provide tax benefits to long-term share investors to help stem the Kospi index's decline, Vice Finance Minister Kim Dong Soo said yesterday. Kang said today the government should cut taxes and increase its spending to stoke local demand as export growth slows.

Korean Banks

Concern about the banking system, initially triggered by the global credit squeeze, deepened as a slump in the domestic property market raised fears that debts made to builders could turn bad. S&P put Kookmin Bank, the nation's largest, and six other financial firms on CreditWatch with negative implications on Oct. 15.

``As has been done in many other countries, a bank guarantee would definitely help restore confidence in Korea's liquidity situation,'' Kwon Jae Min, a credit analyst at S&P in Hong Kong, said today in an interview.

The credit crisis has raised the cost of borrowing and reduced access to funds as global lending dried up. South Korean banks secure as much as 12 percent of their funding from international markets, according to Moody's Investors Service.

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

Currency, Shares

The won fell 9.7 percent yesterday, the most since the International Monetary Fund bailed out South Korea in December 1997. The currency gained 2.8 percent to 1,333.93 per dollar today after the central bank changed rules in the foreign- exchange swap market to increase banks' access to funds.

The Kospi index declined 2.7 percent to 1,180.67, the lowest level since October 2005. KB Financial Group Inc., the holding company of Kookmin Bank, slumped 12 percent, adding to yesterday's 15 percent tumble.

The global credit crunch is placing ``severe pressure'' on the ability of South Korean banks ``to roll-over their external funding requirements,'' Moody's said. ``Our assessment is that the government of Korea still has the resources to provide dollar liquidity to domestic banks.''

South Korea has been amassing foreign currency since the Asian financial crisis and is now the world's sixth-largest holder of reserves. Its holdings fell for a sixth month in September to $239.7 billion as policy makers intervened to stem the won's slide and provide liquidity to the financial system.

``The government should try to restore confidence in the market because there is panic,'' said Ma Tieying, an economist at DBS Group Holdings Ltd. in Singapore. ``They should also consider using fiscal measures to boost the real economy.''

South Korea has been reliant on increased exports to China, Europe and the Middle East to drive economic growth as rising living costs and record debt levels crimped consumer spending. The economy grew 4.8 percent in the second quarter, the weakest pace in more than a year.

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