Korea Banks’ Foreign Debt Burden Has Fallen, Ahn Says

By Kim Kyoungwha and Bomi Lim

Feb. 18 (Bloomberg) -- South Korean banks’ demand for dollars is decreasing as foreign-currency debt maturing every month this year is at least 50 percent lower than in the fourth quarter, a central bank official said.

Monthly foreign debt payments due have dropped to about $4 billion, from between $8 billion and $9 billion in the final three months of 2008, Ahn Byung Chan, director general of the Bank of Korea’s international bureau, said in an interview from Seoul yesterday. Concerns that Korean banks are facing a shortage of funds deepened after Woori Bank’s failure to meet an early repayment of 2014 debt roiled investors.

“Our banks are not having trouble getting foreign funding now,” Ahn said. “They are facing less need for foreign borrowing compared with the final quarter of last year.”

South Korea’s won has slumped 34 percent against the dollar in the past year, the worst-performing of the world’s 16 most- active currencies, on concern banks will run short of the greenback as exports slump and global funds dump emerging-market assets. South Korea has as much as $160 billion of external debt maturing over the next two years, compared with foreign-exchange reserves that shrank 23 percent in the past year to $200 billion, according to UBS AG, the world’s second-largest currency trader.

“They are left with no choice but to maintain a strong front,” said Nizam Idris, a currency strategist with UBS in Singapore. “The relative shortage of dollar liquidity domestically has remained strong, although not yet as bad as it was in November.”

Won Decline

The won weakened 0.5 percent to 1,462.60 per dollar as of 11:31 a.m. in Seoul, extending this year’s loss to 14 percent. The one-year cross-currency swap rate, a gauge of availability of dollars, slid to a record minus 1.7 percent yesterday, indicating Korean banks need to pay extra interest on top of floating rates to borrow dollars. It was at minus 1.6 percent today. In such swaps, two parties agree to exchange payments in one currency for payments in another.

“The shortage of dollars has become more acute in South Korea as evident in the cost for banks to swap won for dollars,” Marc Chandler, global head of currency strategy at Brown Brothers in New York, wrote in a note today. “The dollar has near term scope towards 1,500.”

The slump in the Korean won was compounded by concerns that a prolonged global recession may “hurt the export-driven Korean economy,” starving banks of foreign exchange, Ahn said. He forecast the nation will post a trade surplus of as much as $2 billion this month after a shortfall of $3.3 billion in January.

March Crisis?

Speculation the country is headed for a “March crisis” when Japanese financial institutions close their books is groundless, Ahn said. Banks in Korea, including local branches of foreign financial institutions, have about $6 billion of yen debt due to be paid by March, he said. Their total yen denominated debt stands at $25 billion.

Nomura Holdings Inc. cut its forecast for South Korea’s gross domestic product for the second time in a month, predicting the economy will shrink 6 percent in 2009, a deeper contraction than the 2 percent decline forecast in January.

The government is close to setting limits for how much individual banks can draw from a 20 trillion won ($14 billion) state-backed recapitalization fund, Shin Dong Kyu, chairman of the Korea Federation of Banks, said in an interview yesterday.

Getting money from the fund may help Korean banks avoid skipping options to redeem their subordinated debt, Shin said. A decision by Woori Bank, the nation’s second-biggest lender, not to redeem $400 million of callable debt drove up the cost for Korean lenders to borrow dollars in the swap market.

The Bank of Korea will provide 10 trillion won for the recapitalization fund and state-owned Korea Development Bank will put in 2 trillion won. The remainder will come from private investors. The fund will be used for buying banks’ preferred shares and subordinated debt.

Shin, 57, dismissed concerns that Korean banks may struggle to repay overseas debt, saying foreign-exchange reserves will allow the country to help them meet obligations if necessary.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Bomi Lim in Seoul at blim30@bloomberg.net