June 7, 2011 / 12:30 AM / 9 years ago

South Korea warns euro zone troubles could hit here

SEOUL, Jun (Reuters) - South Korea on Tuesday called for careful watch over the euro zone’s debt problems, saying Asia’s fourth largest economy could face foreign-currency liquidity shortage if the financial instability continued for a long time.

“If Europe’s fiscal problems continued, de-leveraging of (European investments in) emerging-market countries could take place,” the Financial Services Commission said in a statement.

“Once European banks begin to call in their lending, the foreign-currency liquidity among banks (in South Korea) could worsen,” it said, although adding there was no evidence of such instability yet.

South Korea has frequently fallen victim of a squeeze in international financial markets as its banking system is heavily exposed to short-term overseas borrowings. It did so most recently in the 2008 financial crisis when its credit default swaps ballooned out.

It has introduced three main sets of capital controls over the past one year to curb short-term foreign borrowings and slow short-term capital inflows, which at times of stress could seek to quit the country at the same time.

Reporting by Yoo Choonsik; Editing by David Chance

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