The South Korean government on Sunday announced a package of foreign currency payment guarantees for domestic banks, worth $100 billion, in a bid to help stabilize the nation's volatile financial markets.
Under the latest policy package agreed upon during a meeting of top policymakers and ruling party leaders, the government will guarantee the payment of all foreign currency loans raised by Korean lenders abroad until June next year for a period of three years.
In a relevant move to expand the nation's foreign currency liquidity, the government will also extend an additional $30 billion to banks and small- and medium-sized exporters while infusing about 1 trillion won ($770 million) into the state-funded Industrial Bank of Korea to support cash-strapped small businesses.
The government's unprecedented foreign currency settlement guarantee program was mapped out early Sunday morning, when Prime Minister Han Seung-soo met with Grand National Party Chairman Park Hee-tae and other top government and party officials to discuss measures to stabilize the local financial market.
All told, the government's latest foreign currency payment guarantee will amount to about $100 billion won, said the officials who attended the meeting.
They said two state-run lenders -- the Korea Development Bank and the Export-Import Bank of Korea -- will temporarily cover the foreign loan payment guarantees for local banks until the National Assembly approves the government's guarantee initiative. Following parliamentary approval, the Korean government will begin to directly offer its payment guarantee, they explained.
"The government's decision to fully guarantee its banks' foreign exchange transactions has been reached in accordance with international market trends, as well as in consideration of Korean banks' circumstances, following the outbreak of the U.S.-originated financial crisis," said an official.
"Considering the nation's foreign exchange holdings, however, the government will set ceilings on the volume of its foreign loan guarantees, depending on banks. It may also consider imposing an upper limit on the aggregate guarantee volume," said the official.
The latest confidence-bolstering measures come after the main Korean stock market index plunged to a three-year low and the Korean won slumped the most since the 1997 Asian crisis after severe fluctuations throughout the past weeks.
Standard & Poor's has said the Korean government should consider guaranteeing its banks' debts, following similar moves in Australia, Europe and Hong Kong, to help lenders overcome difficulties obtaining offshore funding.
The South Korean government's foreign currency holdings are now estimated at slightly below $240 billion, the sixth-largest in the world.
Meanwhile, the government and the ruling party also decided to provide sweeping tax benefits to long-term share investors to help stem the stock market's decline.
"Countries worldwide are now moving to pump in public funds to overcome the financial crisis. We also must follow the global trends in order not to suffer counter-discrimination," Prime Minister Han said at the meeting.
"The possibility of an economic slump is very high amid the rapid worldwide spread of the U.S.-originated financial crisis. The government and the ruling party will have far more discussions to tide over the crisis," he said.