S Korea to recapitalise banks in response to dollar shortage
Sunday, 14 December 2008
Christian Oliver and Kang Buseong
Seoul: South Korea's central bank held an emergency meeting early this month to revive paralysed lenders with a package of stimulus measures, a move that coincided with news that Seoul's foreign reserves had slipped to their lowest level in four years.
The Bank of Korea said it would make a windfall interest payment of 500bn won ($340m) on reserves deposited by domestic banks. Hoping to loosen lenders' purse strings still further, the bank added it would also include bonds from the Korea Housing Finance Corporation on a list of debt that it buys.
A central bank official said these steps were intended to increase the loans of Korea's banks by 6,3001m won.
This is the latest in a long series of attempts to jumpstart the economy. Korea has announced a $130bn bail-out, slashed interest rates, set up a fund to buy corporate bonds and promised tax cuts. But these have so far failed to restore confidence to lenders, the currency or the stock market.
The credit crunch is posing a severe threat to Korean businesses. C&Heavy Industries, the shipbuilder, recently had to call in the bankers to discuss a restructuring of debts in a bid to stave off bankruptcy. The company complained it had a healthy order book of 60 ships but was sunk by an inability to secure financing.
The companies most at threat from a frozen banking system are the small and medium-sized enterprises that Korea has been trying hard to nurture in an exporting economy that was once the exclusive preserve of massive corporations. Adding to their woes, many SMEs have also been hit by losses incurred through a currency hedging scheme.
The difficulty Korean banks encountered trying to access dollars helped scythe the foreign reserves down to $200.5bn at the end of November, from $212.25bn at the end of October, according to central bank data. Korea is still the world's sixth 'biggest holder of foreign reserves but the speed with which it is burning through its dollars has sounded alarm bells.
Responding to plunging reserves, Bahk Byoung-won, presidential economic secretary, urged Korea not to fritter dollars away to try to prop up the won, which has fallen almost 40 per cent since the end of June.
"We are not in a position to intervene massively in the foreign exchange market ... to lower the exchange rate, nor do we have any leeway for that," he told reporters.
Given the speed at which reserves are dwindling, the government has shown signs of wanting renewed monetary stimulus. The central bank cut rates by 125 basis points to 4.0 per cent over the past two months and pitiful export figures for November have rekindled hopes for more cuts.
Exports lie at the heart of the Korean economy and the latest news that they had plunged 18.3 per cent in November after growing 8.5 per cent in October suggested the economy could take a turn for the worse far more quickly than originally expected. (Under syndication arrangement with the FE)
Seoul: South Korea's central bank held an emergency meeting early this month to revive paralysed lenders with a package of stimulus measures, a move that coincided with news that Seoul's foreign reserves had slipped to their lowest level in four years.
The Bank of Korea said it would make a windfall interest payment of 500bn won ($340m) on reserves deposited by domestic banks. Hoping to loosen lenders' purse strings still further, the bank added it would also include bonds from the Korea Housing Finance Corporation on a list of debt that it buys.
A central bank official said these steps were intended to increase the loans of Korea's banks by 6,3001m won.
This is the latest in a long series of attempts to jumpstart the economy. Korea has announced a $130bn bail-out, slashed interest rates, set up a fund to buy corporate bonds and promised tax cuts. But these have so far failed to restore confidence to lenders, the currency or the stock market.
The credit crunch is posing a severe threat to Korean businesses. C&Heavy Industries, the shipbuilder, recently had to call in the bankers to discuss a restructuring of debts in a bid to stave off bankruptcy. The company complained it had a healthy order book of 60 ships but was sunk by an inability to secure financing.
The companies most at threat from a frozen banking system are the small and medium-sized enterprises that Korea has been trying hard to nurture in an exporting economy that was once the exclusive preserve of massive corporations. Adding to their woes, many SMEs have also been hit by losses incurred through a currency hedging scheme.
The difficulty Korean banks encountered trying to access dollars helped scythe the foreign reserves down to $200.5bn at the end of November, from $212.25bn at the end of October, according to central bank data. Korea is still the world's sixth 'biggest holder of foreign reserves but the speed with which it is burning through its dollars has sounded alarm bells.
Responding to plunging reserves, Bahk Byoung-won, presidential economic secretary, urged Korea not to fritter dollars away to try to prop up the won, which has fallen almost 40 per cent since the end of June.
"We are not in a position to intervene massively in the foreign exchange market ... to lower the exchange rate, nor do we have any leeway for that," he told reporters.
Given the speed at which reserves are dwindling, the government has shown signs of wanting renewed monetary stimulus. The central bank cut rates by 125 basis points to 4.0 per cent over the past two months and pitiful export figures for November have rekindled hopes for more cuts.
Exports lie at the heart of the Korean economy and the latest news that they had plunged 18.3 per cent in November after growing 8.5 per cent in October suggested the economy could take a turn for the worse far more quickly than originally expected. (Under syndication arrangement with the FE)