* Won falls to weakest since March 1998
* Worries about local dollar-funding shortages weigh
* Risk aversion seen barring quick turnaround (Adds more analyst comment, banks)
SEOUL, Feb 27 (Reuters) - The won fell to an 11-year low on Friday on investor concern about a shortage of U.S. dollars in South Korea and analysts said risk aversion fuelled by the fragility of global financial system would impede any recovery.
Analysts conceded that some of the steps taken by the government of President Lee Myung-bak could help improve dollar funding in the long term but said that there was little the government could do to put an immediate halt to the selloff.
South Korea's massive dollar-selling intervention late last year had helped the won KRW= recover some momentum, but fears of defaults and balance of payments crises in eastern European this year have sapped investors confidence anew.
Investors are worried that the heightened risk aversion would make it extremely difficult for South Korea to tap into the global market to secure sufficient dollar funding to pay back maturing foreign debt.
“(The won is) just friendless at the moment, it’s unwanted. But I think most of the bad news is already in the price. I don’t think investors are taking sufficient encouragement and notice of the better numbers, such as on external debt,” said Patrick Bennett, a strategist at Societe Generale in Hong Kong.
“In an environment where risk appetite is low, you’re not seeing the flow that would help lead a recovery in the won.”
The won KRW= fell to as low as 1,542.9 per dollar, its weakest since March 1998, before recovering slightly to 1,534.8 by 0740 GMT on market talk of dollar-selling intervention by foreign exchange authorities in the afternoon.
Some analysts said South Korean authorities would have to intervene and sell dollars at least to stop the panicky sentiment from driving the won down further.
“South Korea could not, and should not, let confidence about the won fall at this time. It could lead to a self-fulfilling prophesy of a FX crisis,” said Daniel Soh, FX strategist at FORECAST Pte Ltd.
HEAVY FOREIGN DEBT
Seoul shares .KS11, which gained as much 2.09 percent earlier in the session, fell back as the won fell, closing up 0.78 percent.
South Korea said on Thursday it would exempt foreign investors from income and capital gains taxes on investment in local treasury bonds and monetary stabilisation bonds to lure more foreign capital into the country.
The won’s drop came even after data showed on Friday that South Korea’s balance of payments surplus hit a near 2-year high in January as domestic investors sold off their foreign portfolio holdings and foreigners bought local shares. [ID:nSEO194004]
Banks in South Korea, including those run by foreigners, had $126.6 billion of foreign debt due this year as of the end of January, out of the total $182.3 billion worth, the government said Friday. [ID:nSEO212505]
South Korea has said its foreign currency reserves of more than $200 billion and currency swap arrangements sealed with the United States, Japan and China totalling some $90 billion were more than sufficient to cover any emergency situation.
It has also said it was not obliged to repay all the debts because some were owed by foreign banks and some others were linked to currency hedging by their corporate clients.
The won came under more pressure in recent months as evidence mounts that the heavily export-dependent economy will be hit especially hard by the financial and economic crisis.
South Korea’s government expects the economy to shrink by about 2 percent this year but analysts forecast a contraction of as much as 7 percent, which would be the sharpest fall since the country began industrialising nearly 40 years ago.
The government has offered about $100 billion worth of fiscal spending and tax cut plans and the central bank slashed interest rates by 3.25 percentage points in less than five months to lift domestic demand.
It also plans to pump some $13 billion into recapitalising local banks so that lenders can keep lending. The financial regulatory agency said late on Friday that 14 banks applied for a combined $8 billion in new capital. [ID:nSEO223054]
* For details on South Korean foreign debts, double-click [ID:nSEO48526] and [ID:nSEO129537]
* For a graphic on won and South Korean CDS trends, see: here
* For graphics on by-country breakdown of corporate bonds in Asia maturing 2009-2012 see here
* For analysts’ reaction, double-click [ID:nSEO124840] (Editing by Jonathan Hopfner & Kazunori Takada)
Our Standards: The Thomson Reuters Trust Principles.