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S. Korea pledges $130 billion to avert meltdown

South Korea announced a package worth over $130 billion to rescue its markets amid the global financial crisis, offering a guarantee on foreign debt and promising to recapitalize financial firms.
/ Source: Reuters

South Korea announced on Sunday a package worth over $130 billion to rescue its markets dragged down in the global financial crisis, offering a state guarantee on foreign debt and promising to recapitalize financial firms.

Asia's fourth-largest economy has looked one of the region's most vulnerable to the credit crunch with its banks struggling to find the dollars they need to pay debt and as frightened investors hammered down the won to its lowest in over a decade.

The country's top three economic planners told a joint news conference that on top of the guarantees worth $100 billion, they would also inject $30 billion to banks and exporters and help smaller firms get some 12 trillion won ($9 billion) in loans.

"The government has decided to join in global coordinated efforts to stabilize financial markets and we'll continue to provide pre-emptive, decisive and sufficient measures to this end," South Korea's Finance Minister Kang Man-soo told reporters.

The past fortnight has seen a storm of market support measures from financial authorities around the globe ranging from interest rate cuts to bank nationalizations.

"We believe providing the government guarantee on banks' foreign exchange dealings is the strongest step to save our foreign exchange reserves," Kang said.

They also said they would announce this week a separate set of measures to help the local construction industry, among the hardest hit sectors as the global turmoil is seen pushing domestic economic growth to its slowest in over a decade.

Analysts generally welcomed the measures, saying they should help soothe investors and boost local markets, adding they expected the central bank to trim interest rates as early as next month to stimulate sagging domestic demand.

"It seems the government knows what challenges they are facing and how to deal with them," said Hong Sun-young at Samsung Economic Research Institute.

"The government has sent a strong signal to market players in a panic that they will stand as lender of last resort in a crisis."

Sunday's steps come as countries around the world are scrambling to contain the fallout from a 14-month-old credit crisis and a global economic downturn which threatens to be the most serious slump since the 1930s Great Depression.

Recession fear
Bond market analysts said the central bank could sharply cut interest rates at its next policy meeting on November 7, which would bring its first back-to-back rate cuts since the dot-com bubble bust swept through the world economy in 2001.

The Bank of Korea cut the benchmark interest rates early this month by a quarter of a percentage point to 5.0 percent, marking the first rate cut in nearly four years and after eight increases in a row since late 2005.

The global crisis has dried up dollars available to emerging economies and raised fears about the ability of heavily-leveraged South Korean banks to meet their external debts.

The won has lost about a third of its value against the dollar so far this year to hit its lowest level since the Asian financial crisis 11 years ago, and foreign investors have sold off a record 30 trillion won of local shares.

The government said it would inject 1 trillion won worth of securities held by the government into Industrial Bank of Korea, which could allow the bank to offer some 12 trillion won in fresh loans to customers.

Minister Kang said last week growth in the country's nearly $1 trillion economy would probably fall below 4 percent next year from around 4.5 percent this year.

But ratings agency Moody's Investors Service forecast last week the 2009 growth at 2.2 percent, which would be the slowest annual growth since the economy contracted in 1998 during the Asian financial crisis.

The north Asian country said it was not considering injecting public funds to take stakes in domestic banks for now, but said it could take such steps and offer deposit guarantees if necessary.

It said the government guarantee on domestic banks' foreign exchange deals with international banks will be in place until June next year.