By Lee Hyo-sik
Staff Reporter
Many Korean banks and securities companies are rescheduling foreign-currency borrowings or bond issues overseas as major American investment banks are struggling so survive and demanding higher prices for loans and bond-underwriting.
The delays have forced local financial firms to scramble for short-term dollars in the Seoul currency market, pushing the won-dollar rate to hover above 1,000 this week, a Seoul banker said Wednesday. Local financial firms are hesitating to raise funds overseas as risk-averse investors demand more discounts on the issues, which means more costs for Korean issuers, he added.
He and other bankers said the dollar shortage will continue for the time being, which will make the Korean currency lose value against the already battered dollar.
U.S. subprime loan defaults and the credit crunch have made the global financial market extremely volatile, making investors secure cash and safer assets.
Domestic banks now have to pay higher interest on bonds as investors demand higher returns.
The state-run Korea Development Bank (KDB) raised $1 billion overseas in January. The bond, which matures in five years, carried a 1.45 percentage point higher interest rate than the London Inter-Bank Offered Rates, the benchmark rate for bonds. But the state-run bank now has to pay far higher interests if it wants to issue bonds overseas.
``Now is not a good time to issue bonds overseas. As interest rates on dollar-denominated bonds have surged on global credit problems, it has become increasingly difficult to raise funds through the issuance of such bonds,'' said a KDB official who requested not to be named. He said the bank plans to wait for global market to stabilize.
``The market turned from bad to worse over the past few days, following U.S. investment bank Bear Stearns' bankruptcy. But the market is slowly improving since the U.S. Federal Reserve cut it key interest rate by 0.75 percentage points overnight. Also, better-than-expected results from Goldman Sachs and Leman Brothers boosted market sentiment,'' he said, adding the financial market will likely remain volatile for the foreseeable future and that the KDB plans to issue bonds toward the year's end when the market is projected to become more stable.
Local companies could face difficulties in servicing overseas debts through borrowing this year, as banks are struggling to raise fresh funds. Businesses also need dollars to finance operations in foreign countries. An expected trade deficit will create more dollar demand this year. The government projects a deficit of $7 billion in the current account, which covers trades, service trades and certain government-to-government transfers. An exodus of foreign capital from the domestic stock and bond market also creates more demand for dollars.
According to the Bank of Korea, the country's outstanding external liabilities totaled $381 billion as of the end of last year, up $121 billion from a year earlier, as financial services firms increased borrowing from foreign institutions. Of $381 billion, short-term debts, which mature within a year, reached $159 billion, up $45 billion from a year ago.
Prior to the currency crisis a decade ago, the central bank lent its foreign currency reserves to local financial firms when they were short of dollars. But the practice, which triggered the currency crisis, is no longer an option although the nation holds more than $200 billion in reserves.