South Korea has asked domestic banks to pay back as much of their foreign debt borrowed under unfavourable terms as possible, an official at a top financial regulatory agency said on Thursday. The move comes as the won has been recovering quickly since tumbling to 11-year lows against the dollar early this year on doubts among traders about the country's ability to secure sufficient dollars to pay back foreign debt.
"We recently held a meeting with officials from six major banks and advised them to pay back foreign debt carrying unfavourable terms," an official at the Financial Supervisory Service, who declined to be named, said by telephone, without elaborating. South Korean banks had $96.8 billion in foreign debt at the end of June, up from $92 billion three months earlier but far less than $127.3 billion a year before, central bank data released on Wednesday showed.
A severe global credit market squeeze late last year had forced South Korean banks to pay back maturing debt rather than rolling it over, but a stabilising credit situation since early this year has allowed them to expand borrowing again. Some analysts have said a continued rise in foreign borrowing by domestic banks could exacerbate already abundant domestic money liquidity, which once the economy normalises could stoke inflation pressures.