Bangkok--21 Oct--Moody's
The South Korean government's package of measures to help alleviate pressures affecting South Korean banks will likely be helpful to address uncertainties in the international financial system, especially as they are experienced locally, says Moody's Investors Service in a new report. The program centers on a government guarantee on external debt of domestic banks of up to $100 billion over a three-year period and the provision of $30 billion of the BOK's official foreign exchange reserves to domestic banks to ease the dollar liquidity squeeze.
"While the solvency of the Korean system is not currently in jeopardy, the unsettled nature of global financial markets and the unprecedented scope and depth of the global credit crisis make it difficult to assess whether the program will fully restore confidence," said Moody's Senior Vice President Tom Byrne, author of the report. "This will likely take hold only with a normalization of global credit markets."
However, even with severe and protracted stress, he said, Korea's credit fundamentals will most likely not be swamped as they were in the Asian financial crisis of 1997 and the government's A2 ratings are appropriate, especially as Moody's rating approach is to "look through" the business cycle, even a financial crisis, to assess how factors are likely to shake out beyond the immediate challenge at hand.
While Moody's considers the ability of Korea to face the liquidity concerns raised by a probably temporary seizing-up of dollar funding to be sufficient to make preemptive rating changes unnecessary, an expansion of the government's balance sheet and a higher direct vulnerability to exchange rate risk would have to be considered relevant rating factors.
"At this stage, guarantees have not yet migrated into higher government debt, and even if they were to do so, it would be necessary to distinguish between gross and net debt," said Byrne. "Even though the current challenges will likely be more formidable and more difficult to assess than those of 1997, Korea is in a stronger position to deal with them, having remedied weaknesses that were revealed by the earlier crisis."
He said Korea's large and liquid official reserves, which will likely remain above or around $200 billion in the months ahead, and the possibility to benefit, in last resort, from regional monetary solidarity may alleviate liquidity pressures, and brings Korea closer in line with other countries, notably Australia and Europe, that have adopted measures which essentially seek to allay pressures on the ability of banks to fund their dollar positions.
"This will also help reduce investor uncertainty regarding the policy stance and capabilities of the Korean government," said Byrne.
The report is titled, "South Korea's Banking Measures Should Help Alleviate Pressures," and is available at moodys.com.
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