South Korea plays down crisis talk as won hit 2001 low

South Korea's top regulator played down talk of a foreign exchange crisis similar to the one swept Asia a decade ago as the won currency sank to a 7-1/2-year low on fear the country's banks could succumb to global financial turmoil. Ratings agency Fitch said the Korean banks were more vulnerable than most Asian peers to the upheaval that started on Wall Street and now threatens lenders from London to Moscow.
The finance minister urged Korean banks on Monday to sell foreign assets to raise dollars that other bank were unwilling to lend them. During the Asian financial crisis in 1997/98, South Korea only avoided sovereign insolvency with the help of an international bailout of nearly $60 billion led by the International Monetary Fund. "The current situation is much different from during the (Asian) financial crisis because banks are able to secure short-term (foreign exchange) funds despite the difficult situation," said Rhee Chang-yong, vice chairman of the main regulator the Financial Services Commission, told financial analysts.
There have been mounting concerns that as dollar supplies dry up in the local market, South Korean banks face difficulty in paying off their foreign debts. But the latest reassuring words from officials have failed to dispel fears that the credit crunch will bite South Korea's financial industry especially hard because of the high levels of debt in households and smaller companies.
The won the worst performer this year among 10 Asian currencies tracked by Reuters News, was quoted at 1,338.9/40.1 per dollar as of 0008 GMT, compared with Monday's domestic close of 1,269, pulled down by the fast spreading financial crisis that is ripping into markets around the world. At one stage, the won touched its lowest since April 6, 2001 and has lost about a third of its value against dollar so far this year. It fell 5 percent on Monday.
While that helps make South Korea's exporters such as Hyundai Motor and POSCO more competitive, analysts have said that over the longer term any advantage is largely cancelled out by the higher cost of imported materials and the prospect of consumers around the world simply buying less.
On Monday, President Lee Myung-bak called for a summit with leaders of his neighbouring economic giants Japan and China to discuss how to get through the latest crisis. The main Seoul stock exchange fell again with bank shares down as much as 3 percent, though the falls were not as steep as Monday's.
By 0048 GMT the main index was down 1.59 percent, around a two-year low and also about 30 percent down since the start of the year. Local bonds were the one bright spot as investors shifted out of shares into safer assets but traders said the won's rapid falls mean even in this market there is limited appetite.
Regulator Rhee said the government was ready to bring in additional measures to stabilise the stock market. One major ratings agency, Fitch Ratings, said that South Korean banks looked more at risk than others in the region to the global credit crunch.
"There are clearly some vulnerabilities in the banking system with respect to external funding needs, which are all the more important since international credit markets are not functioning normally, but we see no reason to change Korea's ratings," James McCormack, head of its Asia-Pacific sovereign ratings, told Reuters in an email interview.