SEOUL (Reuters) - South Korea tied up a $30 billion currency swap deal with the U.S. Federal Reserve, a move that sent its battered stock market and currency up sharply on belief that the country’s liquidity crisis may at last be easing.
President Lee Myung-bak said the government was ready to take more steps to calm financial markets in Asia’s fourth largest economy, which have tumbled in the global financial storm.
“Fear had sparked excessive selling of the won. I hope the swap deal will stabilize not only the foreign exchange rates but also the entire financial markets,” Governor of the Bank of Korea, Lee Seong-tae, told reporters after swap was announced.
The swap line, which is open until the end of next April and can be extended, means that the central bank can quickly tap a large amount of dollars in exchange for won if the supply at home dries up and threatens to damage the export-based economy.
The Fed made similar arrangements with central banks in Brazil, Mexico and Singapore which, along with South Korea, accounted for 6 percent of the world’s economy in 2007. It has previously established swap lines with central banks in New Zealand, Europe, Canada, Australia and Japan.
Singapore monetary authorities said it was prudent to join given the international character of its financial markets.
South Korea’s central bank insisted the swap deal was not because it was running out of money — it has the world’s sixth largest foreign exchange reserves at $240 billion — but was a backup in case it needs help to ease a U.S. dollar funding shortage that has been tripping up global financial markets.
Investors sent Seoul shares .KS11 up 12 percent, a record daily percentage gain, with banks helping lead the charge after the sector fell sharply just a day earlier on fears of troubled borrowers at home and that government measures may not be enough to prevent a hard landing for the economy.
South Korea’s banking system, heavily tied to the country’s powerful export industry, has looked particularly exposed to the liquidity squeeze making it raise funds to meet short-term foreign currency loan payments.
Officials were quick to say that they would not turn to the International Monetary Fund, which led an international bailout of South Korea during the 1997/98 Asian financial crisis and memories of which still haunt the country. “We can solve the (liquidity) problem even without this swap deal,” Finance Minister Kang Man-soo told reporters.
The won also jumped on the deal, ending local trade up 14.2 percent against the dollar, its biggest daily percentage gain in 11 years.
The government has already announced more than $130 billion worth of measures to ease problems for banks that face rising corporate defaults because of the economic downturn, help the sagging construction industry and cut the cost of loans for smaller firms, which account for the bulk of employment.
Parliament on Thursday passed a government pledge to guarantee up to $100 billion in foreign debt, which also aided the won, traders said.
“I think the liquidity crisis has passed the worst point. The concern now is the real economy,” a senior official told Reuters.
In a sign of the damage to South Korea’s leading companies from the downturn, the world’s second biggest memory chip maker, Hynix Semiconductor, reported its fourth straight quarterly loss with the near-term outlook for the industry looking grim.
News that construction and heavy industry firm C& Group said it had considered applying for creditor-led debt rescheduling rattled investors on Wednesday.
“It seems that investors, who had been all worked up about the C&Group related news, finally grasped the positive nature of the U.S. currency swap line news, which is really the bigger news,” said Ku Yong-uk, a market analyst at Daewoo Securities.
President Lee, a former construction company CEO, said he was ready to do more to help.
“The government will have public (construction) projects executed early and sharply increase social infrastructure spending by revising up the government budget spending plans already submitted to the parliament,” he said in a speech.
In one bit of good news for the economy, the central bank said that months of current account deficits looked to be over with this month likely to see a surplus of at least $1 billion because of an oil price drop and normally inveterate South Korean travelers staying home because of the tumbling value of the won.
Additional reporting by Cheon Jong-woo, Park Jung-youn, Marie-France Han and Jonathan Thatcher, writing by Jonathan Thatcher and Jon Herskovitz; Editing by Jan Dahinten