South Korea to Guarantee Foreign Debt

TOKYO, Oct. 19 -- To shore up a tumbling stock market and a troubled currency, South Korea announced Sunday it would guarantee $100 billion of foreign debt and supply $30 billion to banks and exporters in urgent need of dollars.

Amid a global financial crisis, South Korea has emerged as perhaps the most vulnerable major economy in Asia, despite plenty of foreign reserves in its central bank and booming exports to China, India and the Middle East.

The credit ratings agency Standard & Poor's placed five major South Korean banks on a watch list last week, citing their problems in finding dollars to pay back foreign currency loans. President Lee Myung-bak has pleaded with citizens to stop hoarding dollars and "refrain from greedily pursuing private interests."

Still, finance and central bank officials in Seoul had resisted the kind of sweeping guarantees to banks and financial institutions that have been offered in the United States, Europe and elsewhere in Asia. They had repeatedly said that the fundamentals of their country's economy were strong -- and blamed the foreign press for exaggerating financial problems.

On Sunday, though, the government conceded that fear has trumped fundamentals. South Korea's currency, the won, is down 30 percent against the dollar this year, making it the biggest loser among major world currencies. The stock market has fallen 38 percent. Panicky foreign investors have pulled more than half their holdings out of South Korean stocks.

"As other major economies start providing guarantees to inter-bank 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," a government statement said.

The central bank will guarantee, up to $100 billion, foreign-currency loans made by domestic banks between Monday and the end of next June, the government said. It estimated that these banks already owe about $80 billion on loans that come due before the end of next June.

The Bank of Korea has about $240 billion in foreign exchange reserves and will make $30 billion of it available to local banks that have been increasingly desperate in recent months to find dollars to pay back foreign currency-denominated loans, the government announced.

The loan guarantees require approval from the country's parliament. Until that comes, the government said that the Korea Development Bank or Korea Eximbank will cover the new commitments.

To prop up the struggling stock market and investment firms, the government said it "will provide tax incentives for long-term holdings of funds." And to help small- and medium-sized business, many of which have failed to find credit in recent months, the government said it would make an investment that should release about $10 billion in loans.

Unlike many other countries, however, South Korea decided not to increase the amount of bank deposits that are guaranteed by the government.

Korea's problems with finding dollars grew steadily more alarming this year, even as its exports boomed. Exports are up 28 percent in the first nine months of 2008, according to the Ministry of Finance.