Concerns linger despite S. Korea's eased credit crunch

SEOUL, Nov. 2 (Yonhap) -- South Korea's liquidity crunch has eased considerably
on a swap deal with the U.S. and other market stabilization measures, but it is
still too early to be optimistic about market conditions, experts said Sunday.
Slumping local currency and stock markets rebounded after the Bank of Korea, the
nation's central bank, and the U.S. Federal Reserve agreed on a US$30 billion
currency swap deal on Thursday, raising hopes for eased dollar funding for local
banks amid more liquidity.
The deal -- along with a package of government-led stabilization measures,
including a three-year state guarantee for banks' external debts and
unprecedented interest rate cuts -- seemed to be paying off by shoring up
severely dented market confidence.
South Korean banks and companies are having difficulty in securing enough
liquidity to service debts and pay for their business activities. The Bank of
Korea, which lowered its key interest rate by a record 0.75 percent last week, is
expected to make another cut when it meets on Thursday.
"The worst seems to be over," said Jeon Seung-ji, a currency analyst at Samsung
Futures. "The currency swap deal carries a symbolic meaning in that there are no
more concerns over national bankruptcy."
On Friday, global credit appraiser Standard & Poor's removed South Korea's seven
commercial banks, including Kookmin Bank and Woori Bank, from its watch list for
credit reviews, citing recently improved liquidity conditions.
Experts, however, say that it is "too early" to say that financial instability
has come to an end, as dollar-funding conditions will sour immediately if the
nation's export-driven economy slumps on the back of sluggish global markets.
The prolonged global financial turmoil is currently showing many signs of
affecting the economy worldwide, sparking fears that South Korea's export-driven
economy may be among the list of victims.
The U.S. recently announced that its gross domestic product contracted 0.3
percent from the previous three months in the third quarter, its worst
performance in seven years. Two consecutive minus growth rates constitutes an
economic recession. South Korea's GDP growth also slowed to 0.6 percent
on-quarter, the worst in four years.
"If the global financial turmoil is prolonged, aggressive dollar funding will
remain tough (for local banks)," a bank official said. "Things will remain
challenging until next year."
It also remains to be seen whether local currency and stock markets will regain
composure as foreign investors continue to trim their holdings in South Korea.
The local currency has lost around 28 percent against the U.S. dollar so far this
year, and the benchmark KOSPI index has almost halved since reaching its peak
late last year, though it has gained some ground following the deal with the U.S.
Stabilization in the financial markets will hinge on foreign investors, analysts
said, as they continue to dump local shares in line with their moves to stay away
from risky assets amid deepening global financial instability.
According to market data, foreigners sold a net 40 trillion won ($31 billion)
worth of local shares since the start of this year.