South Korea Plans $20-Billion Loan Guarantee Program

SEOUL — As fear of spreading bankruptcies pushed stock prices down both here and in Japan, the South Korean government announced plans for a $20-billion government loan guarantee effort to head off foreign debt defaults.

The Finance Ministry initially announced on Friday that it would submit a bill to parliament allowing the government to guarantee $10 billion of the money that South Korean companies owe to overseas banks. Early today, the ministry said it would double the amount.

The bill, to be formally submitted Monday, could provide a way for the government to leverage its limited foreign exchange holdings by convincing foreign lenders that it is safe to roll over short-term debt as it comes due. A wave of bankruptcies that has swept South Korea this year--and that threatens to worsen--has led foreign banks to drastically reduce lending to Korean banks and manufacturers.

Seoul’s benchmark Kospi index fell 5.13% on Friday to 397.0. In early trading today, the index edged up 0.8% to 400.19, as the Korean Stock Exchange suspended trading of three companies on speculation that two of them had missed loan repayments Friday. They are Seokwang Construction Co. and Dong Sung Co., both construction firms. Trading was also suspended in Hyosung Motors & Machinery Co., which has a big stake in Dong Sung.

“Companies with large debts are struggling to raise money,” said Ko Kyung Bae, an analyst at Hyundai Securities Co. “It’s dubious how many companies will be able to survive against such a rise in financing costs.”

The country’s currency, the won, fell 4.5% on Friday to close at 1,550 to the dollar.

In Japan, stocks plummeted in morning trading Friday, then recovered slightly from the day’s low. The 225-stock Nikkei index fell 846.75 points, or 5.24%, on Friday to close at 15,314.89. The Nikkei does not trade on Saturdays.

The plunge in Tokyo stocks was triggered by word that foodstuffs trader Toshoku Ltd. had filed for protection from creditors after piling up debts of $5 billion. Sentiment was also depressed by concerns that financial stabilization and tax-cut policies announced by the Japanese government earlier in the week may be too weak to achieve the desired effect.

The decline was led by Toshoku’s creditor banks, including Yasuda Trust & Banking Co., the Long-Term Credit Bank of Japan and Sakura Bank.

The plunge of the South Korean won also undercut Japanese chemical, semiconductor and steel stocks. South Korean firms compete against Japanese companies in those industries, and a weaker won boosts Korean competitiveness in overseas markets.

In Seoul, the government’s foreign exchange reserves have been boosted by initial fund transfers from a $60-billion International Monetary Fund bailout package. But it remains unclear whether enough dollars will be available to South Korean firms to avoid defaults on foreign debt in the coming weeks and months.

The election Thursday of longtime opposition leader Kim Dae Jung as South Korea’s next president also raised concerns of some investors in South Korea and in stock markets around the world, some analysts said.

Financial markets are concerned whether Kim “can really implement all the promises and agreements with the IMF,” said Katsuhiro Hoshi, an analyst at Kankaku Research Institute in Tokyo. “That in turn affected Asian markets. . . . Japan is no exception, and of course, there is Toshoku’s collapse, plus there are still other rumors” of more Japanese bankruptcies to come.