South Korea govt helps ailing Hanbo

South Korea govt helps ailing Hanbo

SEOUL (Reuter): South Korea on Saturday pumped cash into insolvent Hanbo Steel Co in a bid to resurrect it as the central bank governor assured investors that the authorities had taken measures to stabilize the financial market.

State prosecutors, who arrested Hanbo founder Chung Tae-soo on Friday over a loan scandal involving the steelmaker, widened their probe to find out if he tried to bribe politicians or bankers to secure massive loans, a prosecution official said.

"Creditor banks have already provided 50 billion won ($58 million) to help normalize Hanbo Steel," an official of a leading creditor bank told Reuters.

The money is part of 100 billion won set aside to keep Hanbo Steel running and to help the company's suppliers weather difficulties caused by Hanbo's suspension of payments, he said.

"Creditors agree with the government that Hanbo Steel must be rescued," the bank official said. "That will be the best way for us to secure better collateral."

Hanbo Steel, South Korea's second largest steelmaker, defaulted on debt repayments last week after accumulating five trillion won in loans from 61 banks and financial institutions.

Central bank governor Lee Kyung-shick told a news conference that creditor banks had agreed to offer fresh loans to allow Hanbo to complete a new steel mill now under construction.

The rapid expansion of the mill at the southwestern city of Tangjin is largely responsible for Hanbo's insolvency but creditors said the construction was at its final phase.

State-backed Pohang Iron and Steel Co, South Korea's largest steelmaker, said it agreed in principle to run Hanbo Steel on behalf of its creditors.

The move followed President Kim Young-sam's order on Friday to draw up measures to keep Hanbo Steel running. The company is the flagship of the Hanbo Group, South Korea's 14th largest conglomerate.

Kim said Hanbo's failure, which followed nearly a month of nationwide labor strife, dealt a blow to the already slowing economy.

Lee said the Bank of Korea had taken steps to avoid a credit crunch by managing money supply flexibly and the local money market remained stable despite the Hanbo problem.

The central bank has released 3.6 trillion won since last week through money market operations. "The local money market is more or less stable now," Lee said.

He said the impact from the Hanbo failure was exaggerated in some international financial markets, including those in Tokyo and that some overseas branches of South Korean banks faced difficulty in raising funds.

"Overseas borrowing conditions worsened slightly for some banks but overall it is not a worrying level," Lee said.

International credit rating companies have placed under review for possible downgrade the ratings of some South Korean banks after Hanbo's insolvency was announced last week by its major creditor banks.

Lee said some South Korean banks would soon sell foreign securities and other assets to generate funds to support overseas branches facing cash shortages.

"I think this situation will be resolved soon," Lee said. Hanbo's creditors have said they will back the company's request for court receivership by suspending demands for debt repayments.