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SEOUL - South Korea on Sunday announced a government guarantee worth up to 100 billion dollars on foreign borrowing by its banks in a bold move to stabilise turbulent financial markets.
Separately, it will supply 30 billion dollars from foreign reserves as soon as possible to local banks and exporters to ease a dollar shortage which has been driving down the won.
The Strategy and Finance Ministry said in a joint statement with the central bank and the regulatory Financial Services Commission that the measures were in line with global efforts to fight the international credit crisis.
"As other major economies start providing guarantees to interbank loans, the Korean government 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 markets," the statement said.
The package includes a three-year government guarantee for interbank foreign-currency loans, the additional liquidity supply by the central bank to the banking sector, tax incentives and other measures.
"When Korean banks or their overseas branches take on external debt from October 20th this year to June 30th, 2009, the government will offer guarantees to the debt for three years," the statement said.
Despite foreign reserves of almost 240 billion dollars, South Korea was seen as vulnerable to the current turmoil because of a surge in short-term foreign borrowing by its banks in the past year as US interest rates fell.
The global credit crunch was complicating efforts to roll over those loans, causing a scramble for dollars and a plunge in the won's value.
As of Friday the won had fallen some 40 per cent against the dollar this year, making it Asia's worst-performing major currency.
The stock market meanwhile ended the week at a three-year low.
The government said it would provide tax incentives for long-term holdings for funds, to stabilise the stock market and asset management companies.
It said it would also invest one trillion won (750 million dollars) in the state Industrial Bank of Korea to support cash-strapped small businesses.
But the statement said Asia's fourth-largest economy remained in good shape.
"Despite the recent credit crisis, Korea's real economy and its financial sector are sound," it said, citing steady export growth and the "healthy" banking sector.
"By various international standards, Korea's foreign exchange reserves are sufficient."
Kim Hyun-Wook, senior analyst with the state-run Korea Development Institute, told Yonhap news agency the package focused on stabilising the foreign currency market.
"The measures stem from the perception that the stabilising of the foreign currency market should be a priority," Kim said.
Another analyst said the move sent a positive signal.
"When things are getting worse, such a strong action by the government sends a positive signal to the market," said Lee Sun-Yup of Goodmorning Shinhan Securities.
"Especially, the additional dollar supply and debt guarantee will help ease the liquidity squeeze that sent the local currency market into chaos."
Prime Minister Han Seung-Soo urged parliament to support the package. Two state-funded banks will provide the debt guarantees until the government secures legislative approval.
"Experts talk about the real economy slowing down. We have to do our best to tide over the financial crisis and stop an economic slump," he told a meeting with ruling party leaders.
The government said it would increase international cooperation, including with neighbouring countries, to tackle the turmoil.
"The government will not only promote multinational collaboration among the Group of 20 industrialised countries, but also reinforce the regional ties centred on Korea, China and Japan," the statement said.
- AFP/yb/ir
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