S. Korea to tap into currency stabilization fund for biz loans

SEJONG, April 29 (Yonhap) -- South Korea plans to provide US$10 billion in loans to businesses starting next month by tapping into its foreign currency stabilization fund established to counter sharp fluctuations in the currency market, the finance ministry said Tuesday.

The money will be available to businesses for a year from May through indirect financing in which the government lends money to banks, who re-lend it to companies in need, according to the ministry.

"This is intended to capitalize on the ample amount of foreign currency liquidity accumulated from the current account surplus and others to help local companies seeking to import facilities or pushing for overseas construction and plant projects," the ministry said in a press release.

"We expect this move to help reduce the costs banks have to pay in raising foreign currency, which will eventually result in lowering borrowing costs for companies," it said.

The ministry added it will impose a ceiling on the amount of money that each bank can borrow from the government in order to prevent excessive concentration of government funds to a single bank or a specific project. The loans can be applied for at 28 banks including branches of 12 foreign banks.

Companies can borrow the money for up to 10 years. Market observers expect that the borrowing costs will be about 10-40 basis points lower than other loans.

The government runs the foreign currency stabilization fund to protect the local financial market from external shocks by issuing state bonds and investing in safe assets such as U.S. Treasurys.

The latest move comes after South Korea logged a current account surplus for the 25th straight month. It posted a current account surplus of $7.35 billion in March, which was also the highest in five months.

The loan will be a boon for companies as borrowing will cost less than market rates. The government says that banks will also be able to reduce their foreign debt by securing government money.

Some argue, however, that it is inappropriate for the government to utilize a fund for currency market stabilization to support risky business activities.

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