South Korea's Won, Stocks Gain on $130 Billion Financial Rescue

By Kyung Bok Cho

Oct. 20 (Bloomberg) -- South Korea's won and stocks rose after the government announced Asia's biggest financial rescue package to open access to overseas credit markets and allay concern of a recession.

The won climbed 1.4 percent to 1,315 per dollar at the close in Seoul. The currency has risen 4.4 percent since Oct. 16, when it suffered its biggest one-day decline since South Korea required an International Monetary Fund bailout in 1997. The Kospi stock index rose for the first time in four days, gaining 2.3 percent.

South Korea, struggling with Asia's worst-performing currency and a stock market that has lost 36 percent this year, guaranteed $100 billion of lenders' foreign-currency debt and said it will provide $30 billion in dollars to banks. The plan, equal to about 14 percent of gross domestic product, was mapped out in an emergency meeting after Standard & Poor's said the nation's banks may have difficulty securing overseas funds.

``We can expect to see a significant stabilization of the financial markets,'' said Kim Young Il, who oversees the equivalent of $6.5 billion as head of equities at Korea Investment Trust Management Co. in Seoul. ``But it will take time for the real economy to improve, and that means investor sentiment won't immediately show a turn for the better.''

The currency gained 9.7 percent before trimming its advance, according to Seoul Money Brokerage Services Ltd. The won plunged 11 percent Oct. 16 after S&P said there's a greater than 50 percent chance banks won't be able to find foreign funding, threatening their ability to repay short-term debt.

Kospi Gains

The benchmark Kospi stock index climbed 26.96, or 2.3 percent, to 1,207.63 at the close, led by exporters Samsung Electronics Co. and Posco, Asia's third-biggest steelmaker. Hana Financial Group Inc., which controls South Korea's fourth-largest bank, rose 8.4 percent. Shinhan Financial Group Co., which operates the nation's third-largest bank, added 5.3 percent.

Some banks and brokerages fell. Mirae Asset Securities Co., the brokerage affiliate of the nation's biggest asset manager, fell the daily 15 percent limit. JPMorgan Chase & Co. said the government's plan to provide tax benefits to investors who hold shares for more than three years isn't enough to attract money to the market.

Industrial Bank of Korea, the nation's largest lender to small and medium-sized companies, slumped 6.2 percent on concern the government's plan to inject capital into the company may dilute the value of its stock.

Bank of Korea Governor Lee Seong Tae today told lawmakers the worsening economic outlook and market turmoil had made setting interest-rate policy difficult and economic growth this year will be ``low.'' Lee this month cut the benchmark interest rate for the first time in four years, to 5 percent.

Debt Guarantee

South Korea, hampered by a record current-account deficit and shrinking currency reserves, joins Europe, Australia and Hong Kong in providing banks with state backing to ease a global lending drought. Korean banks get as much as 12 percent of their funding from international markets, according to Moody's Investors Service.

The government will guarantee local banks' new foreign debt taken out between today and June 30, 2009. The protection is valid for three years. To boost dollar liquidity, the government will provide the banking industry with $30 billion from its foreign- exchange reserves.

The support package should boost confidence in the banking system and return attention to ``Korea's solid macroeconomic fundamentals,'' the IMF said in a statement.

South Korea's financial sector remains ``sound'' and banks have no need for a direct capital injection capital, Deputy Finance Minister Shin Je Yoon said today. The government yesterday said it had no immediate plan to increase deposit guarantees.

`Fizzle Out'

``They did the best they can do to contain the spread of the crisis on their home turf,'' said Oh Suk Tae, an economist at Citigroup Inc. in Seoul. ``But the measures could fizzle out if banks can't borrow from abroad because the external environment isn't making much headway.''

The rate on 91-day certificate of deposits, a key money market rate, rose for a seventh day to 6.12 percent, the highest since Jan. 19, 2001, according to Korea Securities Dealers Association. A basis point is 0.01 percentage point.

The won should gain further as falling oil prices cut the nation's import bill and the government taps its $239 billion of foreign-exchange reserves to boost dollar supplies, said Kwon Goohoon, an economist with Goldman Sachs in Seoul.

``Korea isn't facing an issue of solvency,'' Kwon said. ``Its fundamentals are sound and reserves are not a problem.''

Government bonds rose, pushing the yield on the 5.75 percent bond maturing in October 2018 down 9 basis points to 5.50 percent.

``The fundamentals of the economy still aren't good, so yields will come down,'' said Park Se Girl, who oversees the equivalent of $1.7 billion in bonds and alternative investments at Meritz Asset Management Co. in Seoul. ``Foreign investors also appear to have a general concern about the risks in Korea.''

The finance ministry today canceled the sale of 150 billion won of inflation-linked bonds on Oct. 22. and cut a sale of 20- year bonds by 40 percent. Investors bid for only 80 percent of the 800 billion won of debt offered in a 10-year bond auction today.

To contact the reporters on this story: Kyung Bok Cho in Hong Kong at kcho7@bloomberg.net.