WRAPUP 2-S.Korea banks back bond fund to fight crisis
Reuters - 2 hours 11 minutes ago
* South Korean banks to chip in $5.5 billion into bond fund
* Banks to cut down on bond offerings
* Central bank to use another $3 bln from Fed swap line
* Stock market jumps 7.5 percent, won gains 2 percent
By Kim Yeon-hee and Cheon Jong-woo
SEOUL, Dec 8 - South Korean banks agreed on Monday to stump up 80 percent of a proposed $7 billion fund to buy bonds, helping propel stocks 7.5 percent higher on hopes various stimulus measures would avert the first recession in over a decade.
In other moves, the central bank said it would supply another $3 billion to local banks on Tuesday from its $30 billion currency swap line with the Federal Reserve to support liquidity, while the economy minister said the government would not sit idly by and let viable firms go under.
The Financial Supervisory Service, a top regulator, has also told local commercial banks to expand their capital by a combined 11 trillion won by early next year to strengthen their capital standing, a spokesman said.
The measures spurred foreign investors to buy local equities and pushed the won <KRW=> up 2 percent against the dollar, while government bond prices edged lower on profit-taking from last week's big rally.
But expectations held firm that the central bank would deliver its fourth interest rate cut in two months at a policy meeting on Thursday to try to keep Asia's fourth-largest economy growing.
"Today's broad-based rally is largely led by economic stimulus plan expectations, following the latest moves and comments from high-ranking officials pointing to the likelihood of such steps in both the United States and South Korea," said Lee Kyoung-su, a market analyst at Taurus Investment & Sec.
U.S. President-elect Barack Obama unveiled plans over the weekend for the largest infrastructure investment programme since the 1950s, which analysts said could top a least $500 billion, the latest effort to revive the world's biggest economy.
Like elsewhere, South Korea's policy makers have scrambled to prevent the global financial crisis from derailing the economy with a slew of measures since September, when the collapse of Lehman Brothers sent world markets and economies reeling.
South Korea has offered a government guarantee on $100 billion of foreign debt owed by local banks to shore up confidence in the banking system and 14 trillion won in fiscal spending and tax cut plans to boost domestic demand.
At a meeting hosted by the Korea Federation of Banks on Monday, the chief executives of the country's seven major lenders agreed to refrain from issuing large amounts of domestic bonds to try to get market interest rates lower and thus boost lending.
"Chief executives of banks at the meeting shared the view that banks had to make every effort to have money circulate in financial markets, now that the economic slump and slow exports are hitting small- and medium-sized companies," they said in a joint statement distributed by the federation.
President Lee Myung-bak has complained that market interest rates were not falling in step with the central bank's reductions in its policy rate.
The central bank has cut rates by 1.25 percentage points since early October to shore up Asia's fourth-largest economy.
FUND TO BUY BONDS
South Korea's main financial regulatory agency last month proposed the 10 trillion won fund to buy bonds so that yields on non-government bonds could come down. The central bank later promised to contribute up to 5 trillion won.
Illustrating the extent of risk aversion in the market, the yield on three-year bonds issued by BBB-minus-rated firms <KRCORP=KQ> has risen 1.67 percentage points over the six-week period that policy rates have dropped by 1.25 percentage points.
As the persisting credit crunch threatened many local companies, Knowledge Economy Minister Lee Youn-ho said the government would continue to provide tax cuts and various other financial support to keep them from failing.
"The government will arrange for sufficient trade financing, help otherwise healthy SMEs overcome cash flow problems, and provide incentives such as lower taxes to boost domestic consumption," Lee told reporters.
The Bank of Korea is widely expected to cut the policy rate again on Thursday, a survey of local bond market experts conducted by the Korea Securities Dealers Association showed late last week.
Investment bank UBS forecast last month that South Korea's economy would shrink by 3 percent in 2009 due to cooling exports and a deepening slump in domestic demand. That would be the country's first annual decline in gross domestic product since the Asian financial crisis 11 years ago.
Seoul stock market's benchmark KOSPI <.KS11> jumped 7.5 percent to close at its highest level in four weeks. Foreign investors bought a net 117.9 billion won in shares.
The won ended local trade up 2 percent against the dollar, but is still down about 35 percent loss against the U.S. dollar so far this year, Asia's worst performing currency.
As the won continued to suffer from weakening exports and continued capital flight, the central bank said late on Monday it would supply $3 billion to local banks on Tuesday on top of $4 billion it injected last week.
The money is part of a $30 billion currency swap line that the Bank of Korea tied up with the U.S. Federal Reserve in late October.
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