South Korea seen readying fresh crisis measures

SEOUL (Reuters) - Hopes in South Korea that interest rate cuts by major central banks would cushion the blow of the global financial storm on the export-driven economy lifted the country's markets on Wednesday as reports pointed to fresh measures being prepared by the government.

South Korea's central bank already slashed its main interest by 75 basis points on Monday to 4.25 percent, its largest single cut on record, to try to boost Asia's fourth-largest economy and restore confidence among investors.

International financial markets have priced in a rate cut from the U.S. Federal Reserve later on Wednesday.

Sources told Reuters that the Bank of Japan could be preparing a rate cut on Friday and the European Central Bank and Bank of England are expected to cut their rates next week as policy makers confront the deepest financial crisis in decades.

The rate hopes boosted Seoul shares, which suffered their largest weekly fall last week on fears of a prolonged global recession, more than 7 percent at one point in early trading. At 0400 GMT, the Seoul index was up just under 1 percent on the day.

On Tuesday, the National Pension Service helped boost buying sentiment with comments that it considered the value of local shares as cheap and was moving to snatch them up. Analysts also said investors were looking for bargains among the debris of a hard-hit market, but sentiment remained cautious.

"Foreigners are buying as rate-cut prospects strengthen, but their appetite will likely fizzle soon," said Sung Jin-kyung, a market analyst at Daishin Securities.

The troubled South Korean won, which has fallen by about 18 percent against the U.S. dollar this month, was also boosted by the rate-cut prospects, rallying nearly 9 percent at one point in early trade. At 0400 GMT, it was up 4.3 percent at 1,406.8 won per dollar.

The government was planning to soon launch stimulus measures to increase spending as well as cut income and other taxes in an attempt to jump-start the economy and spur domestic consumption, the major daily JoongAng Ilbo reported, citing financial sources in the government.

Local media also said the government plans to announce this week a relaxation of won liquidity requirements for local financial firms.

The government may also freeze public sector wages and personnel levels next year to keep costs in line, Yonhap news agency.

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Parliament was moving closer to passing a $100 billion plan that would guarantee future foreign debt borrowings by local banks. A vote was expected to come as early as Thursday.

South Korean banks, seen as vulnerable to the global credit crunch, have struggled to raise funds to roll over short-term foreign currency debt, most of it linked to trade financing.

But unlike the Asian financial crisis a decade ago, this time solvency is not an issue for South Korean banks because of the strong position of the country's conglomerates after years of booming exports.

The won's slide this year has been fueled by the capital outflow from investors selling emerging market assets and the soaring cost of imports such as oil, which have swung the current account surplus into a deficit.

South Korea's central bank is due on Thursday to release September current account figures, which could show the monthly deficit shrank from a record $4.8 billion shortfall set in August on a seasonally adjusted basis.

South Korea is expected by the government to post its first annual current account deficit in 11 years this year, which along with the heavy foreign sell-off in local stock markets has undermined the country's balance of payments.

President Lee Myung-bak has said the current account would return to a surplus in the fourth quarter after three consecutive quarters of deficit.

The country's state-owned oil company has considered loaning local refiners as much as a tenth of its crude reserves, which an industry source said on Tuesday may be a way to improve trade account data.

(Additional reporting by Cheon Jong-woo and Seo Eun-kyung; Writing by Jon Herskovitz; Editing by Jonathan Hopfner)