S. Korea to supply more liquidity to smaller firms

SEOUL, Nov. 10 (Yonhap) -- South Korea's financial watchdog said Monday the government plans to expand the supply of liquidity to smaller firms to help them negotiate cash shortages stemming from the global financial rout.

Thirteen commercial banks provided 289 billion won (US$217.3 million) in
liquidity to 145 smaller companies between Oct. 13 and Nov. 7 by extending new
loans or rolling over existing debt, according to the Financial Services
Commission (FSC).
The move is part of a broader plan by the government to extend liquidity of about
4.3 trillion won to smaller firms to help them ease cash shortages amid the
global financial turmoil.
"A state-run credit guarantee agency plans to provide about 3 trillion won worth
of liquidity to the corporate bond markets. The government will also invest a
combined 2.65 trillion won in state-run banks in a bid to increase their lending
capacity," the FSC said in a statement.
Currency option contracts called "knock-in knock-out (KIKO)" enable companies to
sell dollars with a fixed won-dollar rate if the won moves within a certain range
set by the contract. But if the won's value falls below the band, firms are
forced to sell the dollar far below the market won-dollar rate, incurring heavy
losses.
Last year, many smaller companies took the currency options as a way to hedge
currency risks, with expectations that the won's value would not drop sharply.
In 2007, the won rose an average of 2.8 percent against the greenback compared to
2006, but the won's steep falls this year are taking a toll on such companies.
The won has fallen almost 30 percent so far this year.
As of the end of August, a total of 471 small companies took out KIKO contracts,
with their combined losses reaching 1.28 trillion won, it said.
The FSC said the government plans to complete providing liquidity to firms hit by
KIKO by the end of November.
sooyeon@yna.co.kr
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