(3rd LD) BOK to offer banks dollars in timely manner

(ATTN: RECASTS headline, lead; ADDS more info in paras 12,18)
SEOUL, Feb. 19 (Yonhap) -- South Korea's central bank said Thursday it will
provide dollar liquidity to local banks in a timely manner as they still face
difficulties borrowing from abroad.
Speculation has been rampant that local lenders may not be able to repay foreign
debts due in March amid a dollar shortage, stoking worries the banking sector
could slip into a fresh credit crisis.
"Local banks' overseas borrowing conditions somewhat eased following Korea's
currency swap agreement with the U.S., but they are still facing difficulties,"
Bank of Korea (BOK) Gov. Lee Seong-tae said in a report to the National Assembly.
"If necessary, the BOK will provide foreign-currency liquidity in a timely manner
to the market, given the development of the global financial markets and local
banks' dollar liquidity conditions," he said.
In a separate statement, the central bank said local banks have a combined
US$10.4 billion in foreign debts maturing in February and March.
Overseas debt held by local banks, including borrowing and bond sales, reached an
outstanding $67.8 billion as of the end of January, according to the report.
Foreign debt maturing this year after this month is estimated to reach $24.5
billion.
"Considering the country's foreign exchange reserves, the overseas debt of local
banks, worth $24.5 billion, is not that big," the BOK said. The country's foreign
reserves totaled $201.74 billion as of end-January.
"As the considerable amount of overseas debt due in February and March will
likely be rolled over, local banks may have to repay a much smaller amount," it
added.
So far, the BOK has tapped $16.35 billion out of the $30 billion swap line with
the U.S. and provided a combined $13.6 billion to the market through swap
transactions.
The government has shrugged off jitters about a fresh dollar crisis, saying local
lenders' demand for dollars has decreased as the amount of foreign debts maturing
every month this year is half that of last year.
The BOK chief also dismissed such concerns, adding that there is a slim
possibility that Japanese financial firms will pull their money out of the local
market en masse in March when they close their books.
The Korean currency continued its slide against the U.S. dollar for the eighth
straight session as market jitters escalated over dollar liquidity conditions at
local banks and possible default risks in some Eastern European countries. The
won has declined 15 percent to the dollar so far this year.
In the report to parliament, Gov. Lee also said the central bank will focus its
future monetary policy on stabilizing the still wobbly financial market and
propping up the sharply slowing economy.
"The BOK will manage interest rates in a way that maximizes the effectiveness of
the policy by closely checking economic and financial market conditions," he
said.
Lee added that although it is not impossible for the central bank to buy
government bonds, the BOK would only consider such a move as a last resort.
The supply of treasury bonds is expected to increase, as the government plans to
sell more debt to finance its fiscal spending. The government is seeking to craft
an extra budget that will stimulate slumping domestic demand and expedite an
economic recovery.
Asia's fourth-largest economy contracted 5.6 percent last quarter from three
months earlier, the sharpest fall in almost 11 years. Finance Minister Yoon
Jeung-hyun said last week that the local economy will likely shrink 2 percent
this year, the first annual contraction since the 1997-98 Asian financial crisis.
"It is very likely that the Korean economy will shrink this year. Depending on
the situation, the local economy may contract 1-4 percent in 2009," Lee said.
Since October, the BOK has cut its key interest rate by 3.25 percentage points to
a record low of 2 percent.
sooyeon@yna.co.kr
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