South Korean Stocks Surge by Record, Won Soars on Fed Swap Deal

Oct. 30 (Bloomberg) — South Korea’s stock index rose by a record and the won surged after the central bank signed a $30 billion currency swap with the Federal Reserve and President Lee Myung Bak said he’s ready to take more steps to bolster the economy.

The swap line is part of the Federal Reserve’s efforts to alleviate a credit freeze in emerging nations, with the U.S. also providing dollars to Singapore, Brazil and Mexico. Korean lawmakers today approved the government’s $100 billion guarantee of bank debts to aid lenders struggling to access foreign funds.

Korea’s won jumped by the most in a decade as policy makers’ actions helped ease concern the nation was headed for a repeat of 1997, when it needed an International Monetary Fund bailout to help repay offshore debt. The Fed’s dollar provisions are part of increased global endeavors to thaw money markets, with Hong Kong and Taiwan lowering interest rates today following cuts yesterday by the U.S. and China.

“This is the strongest measure so far,” said Chang In Whan, chief executive officer of KTB Asset Management Co. in Seoul, which manages the equivalent of $4.3 billion in equities.

The Fed deal “will create a buffer for Korea’s foreign- currency supply and improve foreigners’ confidence in the country,” Chang said. “It shows the Fed won’t just sit back and watch overseas markets go down.”

Default protection costs on South Korean government debt fell by the most in more than four years. Five-year credit- default contracts on the country’s external debt fell 130 basis points to 435, according to a Bloomberg survey of three dealers.

Stocks Soar

The benchmark Kospi stock index surged 12.3 percent to 1,088.08 at 3:15 p.m. in Seoul, heading for a record one-day gain. Exporters Samsung Electronics Co., Posco and Hyundai Heavy Industries Co. led increases. The index fell 21 percent last week, the biggest drop since at least 1987.

The won climbed 9.4 percent to 1,304 per U.S. dollar, reducing this year’s decline to 27 percent. Two days ago the currency tumbled to the lowest level in 10 years.

“The Fed agreement itself is recognition of the soundness of the Korean economy and currency,” said Lee Min Koo, a strategist at SH Asset Management Co. in Seoul, which manages the equivalent of $1 billion in local equities.

Finance Minister Kang Man Soo said today South Korea is seeking to expand currency-swap agreements with Japan and China, following the U.S. deal. The nation has swap lines of $4 billion with China and $13 billion with Japan.

Current Account

Also bolstering sentiment, the current-account deficit shrank to $1.22 billion in September from a record $4.7 billion shortfall in August, the central bank said today. The current account is the broadest measure of trade, tracking goods, services and investment income.

“The swap deal will stop the vicious circle of concerns over a shortage of dollars in banks and firms leading to a weaker won,” said Go You Sun, an economist at Daewoo Securities Co. in Seoul. “More fundamentally, the trade account should turn to surplus in October. This will further help stem the won’s slide and calm markets.”

South Korea has posted current account shortfalls every month but one in 2008 as oil prices and the won’s tumble drove up the cost of imported goods, sparking concern over the stability of the economy.

A deficit means there are more dollars flowing out of the country than those coming in, reducing U.S. dollar supplies in the local currency market and weakening the won.

South Korea may post a current-account surplus of at least $1 billion in October, Yang Jae Ryong, a central bank statistics official, said today.

Ready to Act

“Our government, along with the Bank of Korea, will provide sufficient and continuous won and dollar liquidity,” President Lee said in a speech in Seoul. Policy makers will, “if needed, implement additional measures preemptively.”

The Bank of Korea cut interest rates by a record 75 basis points to 4.25 percent on Oct. 27 at an emergency meeting.

The central bank plans to use U.S. currency from the Fed deal to provide dollar liquidity to local banks. “This will expand our foreign-exchange reserves and help stabilize the currency,” Governor Lee Seong Tae said in Seoul.

The IMF yesterday approved an emergency-loan program that almost doubles borrowing limits for emerging-market countries and waives demands for economic austerity measures.

The swap and the IMF’s announcement “will considerably ease concerns about shortage of foreign currency at South Korean companies,” SH Asset Management’s Lee said. “One of key drags on sentiment is now lifted.”

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