S.Korea won at lowest since Asia financial crisis

By Park Jung-youn

SEOUL (Reuters) - South Korea's currency fell to its lowest level since the Asian financial crisis a decade ago on fears the region's fourth-largest economy could buckle in the turmoil tearing through global markets.

President Lee Myung-bak dismissed suggestions this week that the country faced a repeat of the Asian financial crisis that pushed South Korea to the edge of sovereign default and senior government officials have repeatedly tried to reassure investors that the banking system can withstand the credit upheaval.

That message was reiterated on Wednesday by Bahk Byong-won, senior secretary to the president, who said the government believed the won's fall was a threat to inflation but liquidity at local banks was not a major problem.

"What I hear from them is that it's not that serious," Bahk told reporters.

Investors remain unconvinced and analysts said that as the global financial crisis continues to hammer South Korea, the won is likely to slide further.

The won slumped as much as 5 percent on the day to 1,398 per dollar, its lowest level since South Korea was beginning to emerge from the ravages of Asia's financial meltdown in 1997/98. It later edged back up to 1,376.90/1,377.10.

This week alone the currency has skidded more than 12 percent in value against the dollar as investors fretted over a global credit crisis that has starved the country's banks of dollars and fueled the worst capital flight from South Korea since the collapse of Asia's markets a decade ago.

"Further losses cannot be ruled out," said Patrick Bennett, strategist at Societe Generale in Singapore. "Portfolio flows are coming out of the market and the level of offshore borrowing by the bank sector remains a risk investors are unwilling to accept - despite the still high level of FX reserves."

In a sign of how worried the government has become, the president called this week for a summit with the Asian economic powers of Japan and China. And the finance minister urged local banks to sell foreign assets to raise dollars that other banks aren't willing to lend them.

SQUEEZE

The tight liquidity in South Korea's banking sector would last until the end of the year, a senior official at state-run Korea Development Bank (KDB) said. He declined to be identified because of the sensitivity of the issue.

The bank plans to raise up to $4 billion from loans, short-term borrowing and private bond deals to help cover an increasingly painful squeeze on foreign currency liquidity in the domestic market, he said.

The government has encouraged state banks to raise funds from bond sales to help ease pressure on commercial banks less able to access funds abroad and because of concerns they could face a struggle to roll over foreign debt payments.

But an official in charge of foreign financing at the country's largest lender, Kookmin Bank 060000.KS, told Reuters on Tuesday that the dollar shortage was not as severe as the market feared. He also declined to be identified because of the sensitivity of the issue.

Reflecting a global assets sell off, the main Seoul stocks index slumped.