South Korea's Won Gains on Financial Rescue; Bank Stocks Rise
South Korea's won and stocks rose 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 climbed 2.7 percent to 1,299 per dollar at 1:41 p.m. in Seoul. The currency has risen 6 percent since Oct. 16, when it suffered its biggest one-day decline since South Korea required a bailout from the International Monetary Fund in 1997. The benchmark Kospi stock index gained 1.3 percent.
South Korea, struggling with Asia's worst-performing currency and a stock market that has lost 37 percent this year, guaranteed $100 billion of lenders' foreign-currency debt and said it will provide $30 billion in dollars to banks. The plan, 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 Oct. 16 after S&P said there's a greater than 50 percent chance banks won't be able to find foreign funding, threatening their ability to repay short-term debt.
Kospi Gains
The benchmark Kospi stock index gained 17.52 to 1,197.9, led by exporters Samsung Electronics Co. and Posco, Asia's third-biggest steelmaker. Hana Financial Group Inc., which controls South Korea's fourth-largest bank, rose 9.1 percent.
Some banks and brokerages fell. Mirae Asset Securities Co., the brokerage affiliate of the nation's biggest asset manager, fell the daily 15 percent limit. JPMorgan Chase & Co. said the Government's plan to provide tax benefits to investors who hold shares for more than three years isn't enough to attract money to the market.
Industrial Bank of Korea, the nation's largest lender to small and medium-sized companies, slumped 6.2 percent on concern the government's plan to inject capital into the company may dilute the value of its stock.
Bank of Korea Governor Lee Seong Tae today told lawmakers the worsening economic outlook and market turmoil had made setting interest-rate policy difficult and economic growth this year will be “low.'' Lee this month cut the benchmark interest rate for the first time in four years, to 5 percent.
`Solid' Fundamentals
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 to ease a global lending drought. Korean banks get as much as 12 percent of their funding from international markets, according to Moody's Investors Service cash advance loans.
The government will guarantee local banks' new foreign debt taken out between today and June 30, 2009. The protection is valid for three years. To boost dollar liquidity, the government will provide the banking industry with $30 billion from its foreign-exchange reserves.
The support package should boost confidence in the banking system and return attention to “Korea's solid macroeconomic fundamentals,'' the IMF said in a statement.
Hana Financial climbed 9.1 percent. Shinhan Financial Group Co., which operates the nation's third-largest bank, rose 2.1 percent.
Fundamentals 'Sound'
“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.''
The won should rebound as falling oil prices cut the nation's import bill and the government 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 a problem.''
The won was Asia's best-performing currency in the four years ended Oct. 31, 2007, soaring 31 percent to a decade high of 899.60 per dollar. That encouraged companies including Ulsan- based Hyundai Heavy 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 the dollar.
Hedges Gone Awry
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 Korea's 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.
Government bonds rose with the yield on the 5.75 percent bond maturing in October 2008 falling 9 basis points to 5.50 percent.
Investors bid for only 80 percent of the 800 billion won of debt offered in a 10-year bond auction. South Korea sold 543 billion won ($414 million) of the bonds at an average yield of 5.50 percent, the finance ministry said today, compared with a Sept. 16 auction that attracted bids for 1.7 times the amount on offer.