May 26, 2010 / 8:43 AM / 10 years ago

S.Korea vows swift action to stabilise markets

SEOUL (Reuters) - South Korean financial policymakers held emergency talks on Wednesday, promising to help banks secure foreign currency if the markets turmoil creates a repeat of the crunch that squeezed them at the height of the global downturn.

People walk as screens show movements of monthly stock price index (L) and a daily stock price index at the Korea Exchange in Seoul October 27, 2008. REUTERS/Lee Jae Won/Files

But both the finance ministry and central bank denied local media speculation they were considering borrowing abroad by selling sovereign bonds or reopening a currency swap deal with the U.S. Federal Reserve.

Stock prices and the currency halted their nearly 3 percent slide on Tuesday, but trading was shaky, investors still nervous about the euro zone’s financial instability and mounting tension between the two Koreas.

“(Authorities) will do their best to minimise the impact that the markets instability could have on the economy and help markets regain stability,” the government and the central bank said in a joint statement issued after the meeting.

“If deemed necessary, (authorities) will draw up measures to stabilise the foreign exchange market, such as supplying a sufficient amount of foreign exchange liquidity,” they said.

South Korea had lent billions of dollars to banks since the outbreak of the global financial crisis, using foreign reserves and a currency swaps with the Fed. The money has since been repaid.

Seoul’s main stock market rose 0.4 percent by 0343 GMT while the won was down 0.2 percent against the dollar, both showing signs of some stability after tumbling as the military tensions with North Korea escalated.

The authorities are widely expected to resort first to intervention in stock and currency markets.

Currency traders reported local authorities selling an unspecified amount of dollars to prop up the won and official data showed the state-run pension fund put in millions of dollars worth of won to buy stocks.

The standoff between the two countries escalated after South Korea announced last week North Korea was found having torpedoed one of its battle ships in late March, killing 46 sailors.

Analysts played down the risk of the standoff developing into an all-out war between the two sides but investors are worried the heightened uncertainty, combined with the unstable global markets, could spark an exodus of foreign investors.

Banks in South Korea rely far more heavily on overseas short-term borrowings than those in rival economies to fund their lending at home, making it highly vulnerable to global credit market situation.

“We think the high level of short-term debt in relation to foreign reserves — 55 percent in Korea versus 20 percent in Taiwan — is what makes the won a VIX currency,” investment bank ING said in a note to clients on Wednesday.

It was referring to the Chicago Board Options Exchange Volatility Index, also called a VIX among market players. A rise in the index indicates an increased anxiety among global investors and would usually drag the won currency down.

The won has fallen more than 11 percent so far this month against the dollar, heading for one of the worst months since the 1997-1998 Asia financial crisis.

(Additional reporting by Lee Shin-hyung; Editing by Jonathan Thatcher)

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