Payment Guarantees for Debts Extended
By Lee Hyo-sik
Staff Reporter
The government plans to extend its guarantee of local lenders' foreign borrowings worth $100 billion by one year through June 2010 to help banks roll over existing loans and borrow more from overseas, easing a dollar shortage here.
The extension is also expected to enable the state debt guarantee scheme to cover not only three-year maturity bonds issued by banks, but also five-year maturity ones. Korean investors will also likely benefit when purchasing foreign currency-denominated bonds sold by domestic lenders. Currently, only foreign buyers of bank bonds are entitled to the government payment guarantee.
``We plan to submit a revision bill to the National Assembly next month for approval to stretch the state debt guarantee through June 2010. We expect the Assembly to pass the bill, which will further facilitate the dollar inflow,'' a Financial Supervisory Commission official said.
In October, the government announced a package of foreign currency payment guarantees for domestic banks worth $100 billion to help stabilize the volatile financial markets. It also said it will guarantee the payment of all foreign currency loans raised by Korean lenders abroad until June this year.
The move came at a time when foreign lenders hesitated rolling over loans held by local banks amid the deepening worldwide credit squeeze, worsening the liquidity shortage here. Domestic lenders borrowed excessively from overseas over the years, mostly short-term loans, to expand their size by extending a huge amount of loans to households and small businesses.
Additionally, the Ministry of Strategy and Finance said it would provide banks with the payment guarantees for their five-year maturity bonds. Currently, only three-year maturity bank notes are subject to the payment warranty.
Since the demise of Lehman Brothers last September, the United States and other advanced countries have introduced state payment guarantees for bonds issued by their financial institutions, issuing bonds worth a combined $400 billion.
But no local lenders have tried to sell bonds overseas through the government warranty, with plunging investors' appetite for risky assets amid the global credit crunch and the abundant supplies of similar bonds issued by foreign financial institutions.
The government plans to sign a new memorandum of understanding (MOU) with domestic banks after the Assembly passes the bill.
The move to replace the MOU signed last November is aimed at encouraging lenders to extend more credit to small businesses and take more measures to better finance economic activities of companies and households.
So far, 18 local banks have raised a combined 5.5 billion overseas. Of the total, $4.5 billion was from state-run banks, including Korea Development Bank.
Government officials also expect the extension of the debt guarantee, and other steps, to make it easier for local lenders to issue bonds to raise dollars.