Lee, Yoon Downplay South Korean Crisis Concern, Pledge Action

By Seyoon Kim and William Sim

Feb. 19 (Bloomberg) -- South Korea’s top policy makers tried to stem concern of a bank funding crisis, pledging to step up efforts to stabilize the financial system and revive an economy that’s headed for its first recession since 1998.

The government plans to boost stimulus spending by a “significant” amount this year, Finance Minister Yoon Jeung Hyun said. The central bank, when needed, will provide dollars to local banks unable to secure funds because of the global credit crunch, Governor Lee Seong Tae said. Both were addressing parliament in Seoul today.

“It’s good to see Yoon and Lee blend their voices together,” said Chun Chong Woo, an economist at SC First Bank Ltd. in Seoul. “They need to work together to take more aggressive measures as quickly as possible.”

Korea’s won has slumped 36 percent versus the U.S. currency in the past year, Asia’s worst performer, on concern a prolonged global recession will roil the export-driven economy, starving the nation of dollars needed to repay overseas debt. Banks’ offshore borrowings are not large when compared with the nation’s foreign-exchange reserves of $201 billion, the world’s sixth-largest holdings, the Bank of Korea said in a report today.

Banks have $24.5 billion of foreign-currency debt maturing between now and the end of 2009, $10.4 billion of which falls due this month and next, the central bank said.

“Local banks’ foreign-currency funding conditions are showing signs of improving since January,” the report noted.

Shares, Currency

The benchmark Kospi stock index gained 0.2 percent to 1,115.44 at 1:33 p.m. in Seoul today, reversing an earlier drop. An index tracking 54 Korean financial shares rose 0.4 percent, ending three consecutive daily declines. The won slipped 0.4 percent to 1,473.2 per dollar, trading close to a two-month low.

Concern that lenders are facing a shortage of funds deepened after Woori Bank, a unit of the nation’s largest financial company, last week decided not to exercise an early repayment option on debt maturing in 2014 as it would cost too much to refinance.

Governor Lee said today that talk of a financial crisis in South Korea next month, when Japanese finance companies close their books, is “groundless.” He said South Korea’s banks don’t have much yen debt that matures in March.

The one-year cross-currency swap rate, a gauge of dollar availability, reached a record minus 1.96 percent today, indicating Korean banks need to pay extra interest on top of floating rates to borrow dollars. In such swaps, two parties agree to exchange payments in one currency for those in another.

“Banks remain overly indebted, which is causing concern in times of global turmoil,” said Oh Suk Tae, an economist at Citibank Inc. in Seoul. “Still, unlike some eastern European nations, Korea isn’t facing the risk of a national default as we have enough reserves.”

The economy contracted by 5.6 percent last quarter, the deepest decline since the Asian financial crisis a decade ago, as exports fell. The government in the past year has allocated 51 trillion won ($34.6 billion) in spending and tax cuts.

The central bank cut the key interest rate to a record-low 2 percent on Feb. 12. Lee said last week he’ll seek new ways to revive the economy and protect the financial system.

To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net.