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Source: www.asiaecon.org |

SOUTH KOREA TO INJECT FUNDS INTO BANKS, DISMISSES FOREIGN-FUNDING CRISIS


  During an abysmal economic period, South Korea announced that it will start injecting 12 trillion won ($8 billion) into banks from a state-backed recapitalization fund next month, by acquiring preferred shares and subordinated debt. The funds are intended to increase the bank's capital base, encourage them to expand lending, and to repay outstanding debt.   The Financial Services Commission (FSC) has confirmed that the state-backed fund would later be expanded to 20 trillion won. The Central Bank of Korea would inject up to 10 trillion won, the state-run Korea Development Bank would contribute two trillion won, and other institutional investors would provide the remainder. The 10 trillion put in by South Korea's central bank will be used for buying banks' preferred stocks and subordinated and hybrid bonds.


 

During an abysmal economic period, South Korea announced that it will start injecting 12 trillion won ($8 billion) into banks from a state-backed recapitalization fund next month, by acquiring preferred shares and subordinated debt. The funds are intended to increase the bank’s capital base, encourage them to expand lending, and to repay outstanding debt.

 

The Financial Services Commission (FSC) has confirmed that the state-backed fund would later be expanded to 20 trillion won. The Central Bank of Korea would inject up to 10 trillion won, the state-run Korea Development Bank would contribute two trillion won, and other institutional investors would provide the remainder. The 10 trillion put in by South Korea’s central bank will be used for buying banks’ preferred stocks and subordinated and hybrid bonds.

 

The amount which banks can access would be determined by the size of their assets, capital adequacy ratios, and their record of lending to smaller firms. The country’s three largest lenders, Kookmin Bank, Shinhan Bank, and Woori Bank, will be eligible to each raise as much as 2 trillion won. Smaller banks such as Hana Bank, Industrial Bank of Korea, and Korea Exchange Bank will be allowed to raise around 1trillion to 1.5 trillion won. The regulator from the FSC said it will accept requests until the end of this week from lenders wishing to seek support.

 

In addition, each bank will be given a credit line from the recapitalization fund, allowing borrowers to get money when needed. The reason for such generous options may be due to the government’s strong stance of anti-government intervention in management. This credit line method will allow banks to use the extra capital to expand corporate lending and support struggling companies.

 

The announcement to inject 12 trillion to 20 trillion won into the struggling banks could have been a response to rumors suggesting a financial crisis similar to the 1997-98 Asian Financial Crisis is looming. On course for its first recession in a decade, South Korea’s economy has been severely hurt by bad debt and rising foreign-currency debt.

 

The currency has plunged more than 15 percent against the dollar this year, as the export-driven economy is headed for its first recession in more than a decade. With a 37 percent depreciation of the won, the cost of foreign-denominated debt has been rising. The banks have $24.5 billion of foreign-currency debt maturing between now and the end of 2009, $10.4 billion of which falls due this month and next. With $1.98 billion of debt to Japanese companies maturing in the first quarter, and the rest maturing by 2010, speculators were worried that there would be insufficient foreign exchange funds.

 

Chin Dong Soo, chairman of the FSC told lawmakers, “We believe various talks about the so-called March crisis are groundless”. He also did not rule out using official reserve transactions to help stabilize the depreciation of the won, using some of the country’s foreign reserves of almost $202 billion to appreciate its currency and pay back debt.

 

Another analyst of the FSC believed that the depreciation of the won will stimulate exports once again. But in the midst of a global economic crisis, exports may not rise as much as they wish.

 

It will cause some stress but, after all, it will be alright,” Soo said. “Korean lenders’ demand for dollars has decreased over the past few months and the country’s foreign-exchange reserves of almost $202 billion would be enough to meet their dollar needs.”

 

The central bank forecast economic growth for this year at 2 percent in December 2008, but plans to release its revised economic growth forecast in April.

 

 

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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