South Korea seeks to shore up banking system

The Bank of Korea said it aimed to minimize fallout from the global credit crisis on the nation’s economy, including providing extra foreign-currency liquidity to the financial system when needed.

South Korea said Saturday that it would guarantee $100 billion in bank debts and supply lenders with $30 billion in dollars to stabilize its financial markets. The government will also provide tax benefits for long-term investors, and the central bank will buy repurchase agreements and government debt to boost won liquidity, the nation’s top three financial authorities announced.

“We will seek stability in the financial and foreign-currency markets and do our best to minimize the negative impact of the financial instability on the real economy,” the central bank said in a report submitted to lawmakers in Seoul.

The Bank of Korea underlined that policymakers would weigh the global financial turmoil, the state of the economy and inflation when setting interest rates. Gov. Lee Seong Tae cut borrowing costs this month for the first time in four years, joining counterparts in Europe, Asia and the U.S. in easing policy as the global credit crunch deepened.

South Korea, struggling with Asia’s worst-performing currency and a stock market that has lost 38% this year, joins Europe, Australia and Hong Kong in providing banks with government backing amid a global lending drought.

The measures should boost confidence in the banking system and return attention to “Korea’s solid macroeconomic fundamentals,” the International Monetary Fund said.

The credit crisis has raised the cost of borrowing and reduced access to funds. South Korean banks secure up to 12% of their funding from international markets, Moody’s Investors Service said.

The $970-billion economy expanded 4.8% in the second quarter from a year earlier, the weakest pace in more than a year as households, struggling with rising living costs and record debt, reduced spending.

“The economy’s growth rate is likely to slow amid weak domestic demand and a deteriorating external environment conditions,” the Bank of Korea said.