South Korea yesterday announced a government guarantee of up to US$100 billion on foreign borrowing by its banks in a bold move to stabilize financial markets.
Separately, it will supply US$30 billion from foreign reserves as soon as possible to local banks and exporters to ease a dollar shortage that has devaluated 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 are in line with global efforts to fight the 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 Oct. 20 this year to June 30, next year, the government will offer guarantees to the debt for three years,” the statement said.
Despite foreign reserves of almost US$240 billion, South Korea was seen as vulnerable to the 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 percent against the US dollar this year, making it Asia’s worst-performing major currency.
The stock market meanwhile ended the week at a three-year low.
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