Currency crisis haunts Korean financial markets

Currency crisis haunts Korean financial markets

SEOUL (AFP): South Korea sank deeper into a financial crisis yesterday as its currency tumbled against the U.S. dollar, sending rattling Southeast Asian markets.

The won plunged to a record low at the close of 975 to the greenback from Wednesday's close of 969.80 on swelling dollar demand by merchant banks facing difficulties in raising funds overseas.

The drop rekindled fears that South Korea's financial turmoil, highlighted by a string of corporate insolvencies, could match those in Thailand and other Southeast Asian economies.

"With financial institutions' funding conditions overseas deteriorated, the won is under increasing pressure," a California Bank dealer said. "The yen's renewed weakness to the dollar strengthened fears of the won falling further."

"The market fears that South Korea may not have enough ammunition to defend the won, prevent the collapse of some of its shaky banks and check the mountain of short-term debt largely denominated in foreign currencies," said a European bank dealer in Singapore.

"The won is being closely watched even as the market keeps an eye on the Thai political situation and what comes out of the IMF (International Monetary Fund) aid packages to Thailand and Indonesia," Alison Seng, analyst with Standard and Poor's MMS International, said.

But the central Bank of Korea (BoK) insisted the fears were "exaggerated." It indicated the won could reach 1,000 to the dollar, but said South Korea's economy was fundamentally different from those in Southeast Asia.

"Our fundamentals are still relatively good. If we solve the problems in the banks we can see our economy going up again," BoK currency manager Yoon Yang-Shik told AFP.

Yoon said that in November six or seven trillion more won will be released by the central bank to stabilize the money market and bring down interest rates.

"As long as the government remains strongly committed the won will not drop as radically as has been predicted by some foreigners. South Korea is not like Southeast Asia, we will be able to control the turbulence," Yoon said.

The won has lost some 15 percent of its value against the dollar this year, pushing up interest rates and borrowing costs and exposing companies to rising costs of forex loan repayments.

Choi Bum-Soo, an analyst at Seoul's financial reform committee, blamed South Korea's financial unrest on reckless business expansion by firms and the outdated skills of South Korean banks.

"The troubles are now with the banking sector as a majority of financial institutions are saddled with unsold real estate provided by firms as collateral," Choi said.

Many economists recommend rapid reforms and restructuring through mergers and alliances to revitalize the ailing financial sector.