October 28, 2008 / 9:00 AM / 11 years ago

South Korean banks go to Federal Reserve for dollars

SEOUL (Reuters) - South Korean banks, viewed by investors as among the weakest in Asia, turned for the first time to the U.S. Federal Reserve for dollars as they stepped up efforts to resolve a dollar funding crisis.

A woman walks past a commuter bus of Korea Development Bank (KDB) at its headquarters in Seoul September 10, 2008. REUTERS/Jo Yong-Hak

The move comes as Asia’s fourth-largest economy tries to keep the global financial storm at bay. South Korea’s consumer sentiment hit a three-month low and its currency slumped to a 10- year trough against the dollar with investors growing ever more worried about a global recession and a liquidity squeeze.

State-owned Korea Development Bank (KDB) said on Tuesday it would sell up to $830 million in 3-month bonds to the Federal Reserve, while top bank Kookmin Bank said it had gotten the U.S. central bank’s permission to directly sell short-dated bonds.

On Monday, the Bank of Korea announced that it would for the first time buy domestic bonds issued by local banks.

“Being picked as one of the beneficiaries of the Federal Reserve’s funding facility means both banks have met conditions set by the Fed,” said Bryan Song, an analyst at Merrill Lynch.

“It will likely take more time (for dollar funding conditions to improve for domestic banks). Dollar funding problems are not because of problems with South Korea, but because companies in the world are deleveraging and reducing their assets to shore up their capital ratios.”

But others were skeptical of the significance of the funding.

“It certainly is a relief for them to win the Fed’s approval. But $800 million would not be enough (to resolve the dollar funding shortage),” said Jeong My-young, research head of Samsung Futures.


Still, South Korea’s stock market and currency both showed unusual resilience on Tuesday, coming back from early falls thanks in part to possible government intervention.

After losing nearly 5 percent initially, Seoul shares .KS11 closed nearly 6 percent higher, as pension funds piled back into the market to snap up stocks at levels analysts said were too cheap to ignore.

“Pension funds are steadily buying into shares, and other domestic institutions including brokerages and insurers are picking up bargains among the debris,” said Kim Seong-bong, a market analyst at Samsung Securities.

Earlier on Tuesday, the National Pension Service justified its purchases as making good business sense.

“The KOSPI is currently near a bottom,” a spokesman for the NPS said. “If we buy now with a three to five-year horizon, we can make profits, so we have started buying.”

Likewise, the won came back from the dead, ending local trade down only 1.7 percent against the dollar after hitting a 10-year low against the greenback and its lowest against the yen since 1989.

It recovered much of those early losses as traders said the foreign exchange authorities were seen selling dollars to prop up the won.

The Bank of Korea’s consumer sentiment index, which measures the outlook in six categories, fell to 88 in October, the lowest since 84 in July. The index stood at 96 in September and August.

Additional reporting by Lee Soo-jung and Cheon Jong-woo; Writing by Marie-France Han; Editing by Jonathan Hopfner & Jan Dahinten

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