S. Korea Vows Loans to Aid Banks

With its currency falling and banks struggling with bad loans, South Korea on Monday said it will spend billions of dollars to prop up its shaky financial industry.

The government proposed making about $4.4 billion in loans available to troubled banks, buying $3.9 billion in bad loans and guaranteeing repayment on loans that banks may arrange with foreign lenders.

A series of major bankruptcies has left South Korean banks with unpaid loans totaling about $16 billion. With their credit ratings in question, some banks have had trouble borrowing abroad.

On Monday, the Korean won fell to its lowest level against the dollar since South Korea removed controls on its currency in 1990.

As the bad news mounted, the government called a meeting of senior economic planners and decided to act.

“The government has decided that comprehensive preventive measures to stabilize market sentiments should be taken to avoid unnecessary economic costs,” Deputy Prime Minister Kang Kyong-shik, the government’s chief economic policymaker, told a news conference.

Kang’s package includes $4.4 billion in loans from the central Bank of Korea to Korea First Bank and other banks carrying the bulk of the bad loans.

The government also was putting together a separate $3.9-billion package to buy nonperforming loans from those faltering banks, Kang said.

The government also plans to raise up to $8.5 billion in foreign loans and deposits to ease a liquidity squeeze in currency markets.

To defend banks’ credit standings and draw badly needed foreign deposits, the government said, it will guarantee repayments of foreign money borrowed by private banks. It also plans to increase the ceiling on foreigners’ stock holdings to 26% in October from the current 23%.

Standard & Poor’s Corp., a U.S. credit ratings agency, changed South Korea’s debt rating outlook to negative from stable earlier this month. In July, it placed five South Korean banks under review. Both developments could make lenders reluctant to advance more credit.