South Korea Pledges $130 Billion to Aid Banks, Market

By Kyung Bok Cho and William Sim

Oct. 20 (Bloomberg) -- South Korea sought to rescue its financial system by guaranteeing $100 billion of lenders' foreign-currency debts and providing $30 billion in U.S. dollars to banks.

The won rose and the Kospi was little changed after the government said it will also give tax benefits for long-term investors, and the central bank will provide ``adequate'' currency liquidity to the markets. The plan, unveiled yesterday, aims to help lenders overcome overseas funding difficulties.

South Korea, struggling with Asia's worst-performing currency and a stock market that has lost 38 percent this year, joins Europe, Australia and Hong Kong in providing banks with state backing amid a global lending drought. The measures should boost confidence in the banking system and return attention to ``Korea's solid macroeconomic fundamentals,'' the International Monetary Fund said.

The guarantee is ``essential,'' said Kim Hag Ju, head of research at Samsung Securities Co. in Seoul. ``Rather than give banks the money they need, it's much cheaper and effective to back their debts so they can borrow it. With the credit freeze, it's extremely difficult for a bank or company to be able to borrow money without a sovereign guarantee.''

The Kospi slipped 0.3 percent to 1,177.11 at 9:29 a.m. in Seoul after initially rising as much as 1.3 percent. The index fell 9.4 percent on Oct. 16, the biggest drop since September 2001, and is heading for its first annual decline since 2002.

Currency Rises

The won gained 4.1 percent to 1,280.80 against the U.S. dollar today. The currency fell last week by the most since an IMF bailout of South Korea in 1997 after Standard & Poor's said it may cut the credit ratings of the nation's largest lenders.

South Korea's government said it has no immediate plan to recapitalize lenders or increase deposit guarantees.

The moves by other countries to guarantee debt spurred the decision, Finance Minister Kang Man Soo told reporters in Seoul yesterday, at a joint press briefing with central bank Governor Lee Seong Tae and Jun Kwang Woo, head of the Financial Services Commission. ``We will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market.''

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.

Solid Economy

The package ``should support confidence in the Korean financial system and return attention to Korea's solid macroeconomic fundamentals, including sizeable foreign reserves,'' IMF Managing Director Dominique Strauss-Kahn said.

The economy is in its 10th year of expansion, driven mainly by increased exports to China, Europe and the Middle East.

South Korea has been amassing foreign currency since the 1997-1998 Asian financial crisis and is now the world's sixth- largest holder of reserves, which fell for a sixth month in September to $239.7 billion.

The government will guarantee as much as $100 billion for local banks' new foreign debt taken out from Oct. 20 to June 30 next year, according to yesterday's statement. The protection is valid for three years.

Policy makers said a recapitalization of the nation's financial institutions or an expansion of deposit guarantees are ``not necessary.'' Still, the government will ``take proper actions'' should the need arise, according to the statement.

Overseas Debt

Korean lenders have $235.3 billion of overseas liabilities, with about $32.7 billion due to mature in the fourth quarter, according to the Financial Supervisory Service.

To boost dollar liquidity, the government will provide the banking industry with $30 billion from its foreign reserves, the statement said. The government has already promised to supply a total of $15 billion to banks and the won-dollar swap market.

Authorities will continue ``smoothing'' operations in the currency market to avoid ``extreme volatilities,'' they said in yesterday's statement.

``They have to do that because the market was pushing them by attacking the Korean won,'' said V. Anantha-Nageswaran, chief investment officer for Asia Pacific at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager for the wealthy. ``They know what the stakes are. The currency could completely careen out of proportion.''

The government will give tax benefits to investors who hold equity or corporate-bond funds for more than three years to encourage long-term investing and stabilize the markets, yesterday's statement said. The breaks include an exemption from taxes on dividends.

South Korea will inject 1 trillion won ($767 million) into Industrial Bank of Korea, the nation's biggest lender to small- and mid-sized businesses, by transferring its equity stakes in the state companies.

To contact the reporters for this story: Kyung Bok Cho in Hong Kong at kcho7@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net