S. Korea's president says currency crisis fears dim

[November 03, 2008]  SEOUL, South Korea (AP) -- President Lee Myung-bak said Monday that a currency swap agreement with the United States last week has greatly reduced fears South Korea could suffer a foreign exchange crisis. The government also unveiled new spending aimed at boosting the nation's slumping economy.

"We can say that concerns about foreign currency liquidity have now almost disappeared," Lee told South Koreans in a radio address, though cautioned that the country should not let down its guard.

Separately, the Ministry of Strategy and Finance announced a plan for the government to increase spending by 14 trillion won ($10.9 billion) in 2009 to support low income citizens and local economies, cut taxes and other measures.

The central bank said last month that South Korea's economic growth slowed in the third quarter to its lowest level in three years as construction contracted and a global slowdown hit manufacturing and exports.

Goldman Sachs economist Kwon Goohoon said the new spending measures are equal to 1.5 percent of South Korea's gross domestic product.

"We take the package as a sound and timely policy initiative to help limit adverse effects of the global slowdown on the domestic economy," he wrote in a report.

Stocks extended last week's gains and the South Korean currency, the won, rose. Also, official data showed that the country recorded a trade surplus for the first time since May as exports increased and oil prices fell.

In his radio address, Lee lauded a currency swap agreement between the Bank of Korea and the Federal Reserve announced last week.

The two central banks said Thursday that the Fed would supply a line of credit worth up to $30 billion. Similar deals were announced by the Fed with the central banks of Brazil, Mexico and Singapore.

Lee said that under the accord, South Korea would have access to the dollar funds "any time when necessary" by swapping won for greenbacks.

South Korean government officials have consistently said the country was well-equipped to deal with the global financial crisis given its stash of $240 billion in foreign currency reserves, the world's sixth largest.

Fears of a repeat of the 1997-98 Asian economic crisis, which forced the country to go cap in hand to the International Monetary Fund for a bailout, were overblown, they said.

Despite the government's assurances, investor sentiment had remained volatile.

Markets in Asia have been hit hard as foreign investors have departed in droves amid the global financial crisis.

In South Korea, the freezing up of credit has made it hard for local financial institutions to acquire dollars, which led to fears of a banking crisis if they were unable to roll over foreign currency loans.

The country's benchmark stock index and won currency, both already down sharply before the global turmoil kicked in with the collapse of U.S. investment bank Lehman Brothers Holdings Inc. in September, extended losses in following weeks.

To try and calm fears, the government guaranteed the offshore debt of its domestic banks, some of which had been threatened with a credit downgrade.

Markets remained shaky amid sharp swings on Wall Street, but began to stabilize last week. The Korea Composite Stock Price Index rose in four of five trading sessions.

The Kospi continued to rise Monday, gaining 1.4 percent to close at 1,129.08 points, though pared earlier gains of as much as 4.1 percent. The index has closed higher in five of the past six trading sessions.

The won rose 2.3 percent to finish at 1,262 against the dollar.

Despite the gains, stocks remain 40 percent lower so far this year, while the won is 26 percent weaker against the greenback.

[Associated Press; By KELLY OLSEN]

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