Korea urges Asia crisis talks as banks feel pressure

By Yoo Choonsik

SEOUL (Reuters) - South Korea appealed on Monday for a summit with Japan and China on a global financial crisis that has starved its banks of dollars and accelerated the country's worst capital flight since Asian markets collapsed a decade ago.

Japan and China have the world's largest foreign exchange reserves, with a combined $2.8 trillion stockpile, and with Seoul they have provided the firepower for a pact to guarantee Asian currency stability since capital fled the region in 1997/98.

With the Korean won currency headed for its worst year since that crisis, Finance Minister Kang Man-soo urged Korean banks to sell foreign assets to raise dollars that other banks are now reluctant to lend them.

He also promised to use Korea's currency reserves, the world's sixth largest at nearly $240 billion, to shield lenders from the financial crisis engulfing the United States and Europe.

The state-run Export-Import Bank of Korea (KEXIM) finished on Monday allocating $5 billion to local banks, as promised, and with two other state banks aimed to borrow nearly $1 billion from abroad, local media reported.

The promise and the dollar injection did little to reassure markets in a country that analysts say faces greater risks than most in Asia from the upheaval that destroyed Wall Street investment banks last month and now threatens lenders from Iceland to Italy.

The Korean won fell 5 percent to its weakest since 2002 and the cost of borrowing on the money market surged. The Seoul stock market, tracking a regional selloff, tumbled nearly 5 percent to a 20-month low.

South Korean President Lee Myung-bak wants to hold talks on the global crisis with leaders of China and Japan, most probably later this month, a presidential Blue House official said.

Lee called last week for the three countries to speed up a plan to create an $80 billion pool of currency swaps among east Asian countries to act a buffer against financial turmoil, replacing a series of individual swap agreements.

Under the existing system of swaps Seoul, Tokyo and Beijing effectively allow poorer Southeast Asian nations to draw on some of their dollar reserves in times of crisis.

BAILOUT

"The government judges that we need to deal with the situation preemptively, while assuming the worst-case scenario," Finance Minister Kang said at a meeting with executives from commercial banks. He did not elaborate on what preemptive action might include.

Kang said it would take a long time for emerging markets to feel the impact of a $700 billion plan approved last week by U.S. lawmakers to buy bad mortgage debt from Wall Street banks, and urged Korean lenders to act quickly.

"Banks need to take measures themselves such as selling foreign-currency securities and other assets to secure foreign exchange liquidity," he said.

Shares in South Korean banks fell in step with the broader market. The bank index has fallen 25 percent this year, against a 28 percent loss in the broader market.