South Korea's won rose for a second day and some bank stocks gained after the government announced Asia's biggest financial rescue package to open access to overseas credit markets and allay concern of a recession.
The won gained 1.7 percent to 1,312 per dollar at 10 a.m. in Seoul, after a slump on Oct. 16 that was the biggest since South Korea required a bailout from the International Monetary Fund in 1997. Hana Financial Group Inc., which operates South Korea's fourth-largest bank, rose 5.4 percent to 21,400 won.
South Korea, struggling with Asia's worst-performing currency and a stock market that has lost 38 percent this year, guaranteed $100 billion of lenders' foreign-currency debt and provided $30 billion in dollars to banks. The package, equal to about 14 percent of gross domestic product, was mapped out in an emergency meeting after Standard & Poor's said the nation's banks may have difficulty securing overseas funds.
``We can expect to see a significant stabilization of the financial markets,'' said Kim Young Il, who oversees the equivalent of $6.5 billion as head of equities at Korea Investment Trust Management Co. in Seoul. ``But it will take time for the real economy to improve, and that means investor sentiment won't immediately show a turn for the better.''
The currency gained as much as 8 percent before trimming its advance, according to Seoul Money Brokerage Services Ltd. The won plunged 9.7 percent on Oct. 16 after Standard & Poor's said there's a greater than 50 percent chance Korean banks won't be able to find foreign funding, threatening their ability to repay short-term debt.
Growth to Slow
South Korea, hampered by a record current-account deficit and shrinking currency reserves, joins Europe, Australia and Hong Kong in providing banks with state backing amid a global lending drought. Korean banks get as much as 12 percent of their funding from international markets, according to Moody's Investors Service.
The government will guarantee local banks' new foreign debt taken out between today and June 30, 2009. The protection is valid for three years.
``We will seek stability in the financial and foreign- currency markets,'' the Bank of Korea said in a report submitted to lawmakers in Seoul today. The economy ``is likely to slow amid weak domestic demand and a deteriorating external environment conditions,'' the central bank said.
Banks to Benefit
``Banks will be the biggest beneficiary of the government's move,'' said Lee Min Koo, head of investment strategy at SH Asset Management Co. in Seoul, which manages the equivalent of $990 million. ``Korea is doing all it can to support the economy and markets. Buffett recently said he's buying America; I think it's time investors did the same in Korea.''
To boost dollar liquidity, the government will provide the banking industry with $30 billion from its foreign-exchange reserves, the statement said. The government has already promised to supply a total of $15 billion to banks and the local won-dollar swap market.
The support package should boost confidence in the banking system and return attention to ``Korea's solid macroeconomic fundamentals,'' the International Monetary Fund said in a statement.
Korea's currency should rebound as falling oil prices cut the nation's import costs and the nation taps its $239 billion of foreign-exchange reserves to boost dollar supplies, said Kwon Goohoon, an economist with Goldman Sachs in Seoul.
``Korea isn't facing an issue of solvency,'' Kwon said. ``Its fundamentals are sound and reserves are not at problem''
Hedging Losses
The won was Asia's best-performing currency in the four years to Oct. 31, 2007, soaring 31 percent to a decade high of 899.60 per dollar. That encouraged companies including Ulsan- based Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. of Seoul, the world's biggest and third- largest shipyards, to buy contracts that lock in an exchange rate or profit from a drop in dollars.
South Korea's banks were the main sellers of the hedging contracts. They borrowed dollars and converted them to won because they also wanted to fix a price for the U.S. currency to limit their exposure to its declines. That contributed to an almost tripling of the nation's external debt due in a year to $176 billion between the end of 2005 and June 30 this year.
Short-term debt is equal to 76 percent of its $239 billion of currency reserves, which is ``the most vulnerable in Asia,'' Brown Brothers Harriman & Co.'s strategist Win Thin wrote in a note to clients. The ratio topped 250 percent during the 1997-98 crisis.
Korean companies may lose as much as 3 trillion won ($2.2 billion) on contracts that are only profitable when the currency remains in a narrow range, said Kwon Jae Min, a credit analyst at Standard & Poor's in Hong Kong.
External Environment
A seizure in global credit markets after Lehman Brothers Holdings Inc. filed for bankruptcy caused foreign investors to flee emerging-market equities, aggravating the shortage of dollars. The MSCI Asia Pacific index of regional stocks slumped a record 39 percent this year. Foreigners sold $32 billion more shares than they bought in South Korea and $10.8 billion in India.
``They did the best they can do to contain the spread of the crisis on their home turf,'' said Oh Suk Tae, an economist at Citigroup Inc. in Seoul. ``But the measures could fizzle out if banks can't borrow from abroad because the external environment isn't making much headway.''
