Yoon Says South Korea Prepared to Support Won, Banks

By Seyoon Kim and Shamim Adam

Feb. 23 (Bloomberg) -- South Korea is prepared to support its currency and add to a bank recapitalization fund should the economic slump worsen, Finance Minister Yoon Jeung Hyun said. The won rose for the first time in 10 days and stocks gained.

The government will act if financial markets “fail or if the market does not function properly,” Yoon, 62, said in an interview yesterday in Phuket, Thailand. “In such situations, the government needs to show a very decisive stance.”

South Korea’s economy is headed for its first recession in a decade as demand from Europe, the U.S. and China for cars, semiconductors and consumer electronics dries up. The won has tumbled 36 percent in the past year, the worst performance in the region, and shares have plunged on concern that local banks are facing a funding crisis as loan defaults increase and offshore borrowing costs surge amid the worldwide credit freeze.

“The government is trying to defend the currency to calm jitters,” said Oh Suk Tae, an economist with Citibank Inc. in Seoul. “The intervention will be limited should the wobbles in the U.S. and Europe continue to test investor confidence.”

Korea’s won, which weakened beyond 1,500 per dollar for the first time in three months on Feb. 20, gained 1.1 percent to close at 1,489 at 3 p.m. in Seoul. The one-day increase was the first since Yoon took office on Feb. 10.

The government is open to “all tools” necessary to help stabilize the currency, including using foreign-exchange reserves, Vice Finance Minister Hur Kyung Wook said today.

Watching Closely

The benchmark Kospi stock index fell 11 percent last week, and has dropped 36 percent in the past 12 months. The index rose 3.2 percent at its close to 1,099.55 today.

In some situations, “intervention is necessary,” though the government “would have to be very cautious,” Yoon said in his first interview since his inauguration. The minister said he couldn’t rule out using foreign reserves.

“We are monitoring the situation very carefully,” he said. “I can only ask for you to watch and see what happens.”

The government is pumping 51 trillion won ($34 billion) of stimulus into the economy, mainly in tax cuts and infrastructure spending. The central bank has cut its benchmark interest rate to a record-low 2 percent.

South Korea has supplied $39 billion of U.S. currency to local lenders and is creating a 20 trillion-won fund to replenish bank capital. Woori Bank plans to draw more than 2 trillion won from the recapitalization fund as bad debts climb.

Bank Assistance

“It’s something we will continue to closely monitor, and if we believe at any time the 20 trillion won is not enough, then we will take other actions,” said Yoon, who headed the nation’s financial services regulator from 2004 to 2007.

Kookmin Bank, the nation’s largest lender, and Woori Finance Holdings Co., owner of the nation’s second-biggest bank, both reported this month their first quarterly losses since 2004.

Non-performing loans in South Korea almost doubled last year, leading lenders to negotiate restructuring plans with construction and shipyard companies.

Yoon was in Thailand for a summit between finance ministers from China, Japan, South Korea and 10 Southeast Asian nations. The ministers yesterday agreed to pool $120 billion of foreign- currency reserves to ensure the region’s central banks have enough to shield their currencies from speculative attacks.

South Korea almost defaulted during the Asian financial crisis a decade ago, as the won tumbled and short-term debt increased beyond the nation’s currency reserves.

The government has been amassing foreign exchange since then to provide a buffer to cope with domestic and global shocks. Reserves totaled almost $202 billion in January, the world’s sixth-largest holdings.

Foreign Debt

Korean banks have about $24.5 billion in foreign-currency debt maturing in 2009, with $10.4 billion due this month and next, according to Bank of Korea data.

Yoon replaced Kang Man Soo, who was fired after less than a year in office, as President Lee Myung Bak replaced most of his economic team as his popularity among voters almost halved since the government took office in February 2008.

Asia’s fourth-largest economy contracted 5.6 percent last quarter from the previous three months, the steepest decline since 1998. Exports, which account for more than 60 percent of the gross domestic product, plunged a record 32.8 percent in January and South Korea lost 103,000 jobs the same month, the biggest drop in more than five years.

Yoon said speculation that South Korea will face a “March crisis” as Japanese lenders seek repayment of loans as their fiscal year ends is not based on “anything substantial.”

South Korea banks have $1.98 billion of debt owed to Japanese companies maturing in the first quarter, an amount too small to trigger a funding crisis, the nation’s Financial Services Commission said today in a report to parliament.

“We have been able to ride the storm up until now and going forward we will also be able to weather the storm,” Yoon said.

To contact the reporters on this story: Seyoon Kim in Phuket, Thailand at skim7@bloomberg.net; Shamim Adam in Phuket, Thailand at sadam2@bloomberg.net.