SEOUL (Reuters) - South Korea will announce measures on Wednesday to ease dollar funding shortages in its local market, two government officials familiar with the matter told Reuters.
The measures will aim to address heightened funding stress involved with the increased cost of raising U.S. dollar funds in Korean financial markets, officials said on Tuesday, without elaborating.
The government is also preparing to announce follow-up measures to address market volatility and the wider fallout from the fast-spreading coronavirus pandemic.
“Measures to ease the funding stress will be released tomorrow,” the official said on Tuesday, adding that it will involve an operation that will be co-ordinated with the Bank of Korea.
The deepening economic impact of the pandemic has plunged major stock markets into bear territory and forced investors to liquidate their holdings of commodities, stocks and riskier bonds. That, and a rush by brokerages to secure dollar funding out of concern about future cash flow, has led to a scramble for dollar financing.
The premium Korean investors were paying to swap their won into dollars hit 269 points on Tuesday KRWCBS1Y=, a record high according to Refinitiv data, suggesting increased demand for the U.S. currency in local financial markets.
The won-dollar currency basis spread indicates the premium Korean financial institutions need to pay on top of dollar LIBOR.
A finance ministry official in charge of the policy declined to comment on the planned release.
The Federal Reserve has not only cut rates to near zero and pledged to pump hundreds of billions of dollars into markets, it has also cut the pricing on its dollar swap lines with foreign central banks to make it easier for them to provide dollars to financial institutions around the world.
South Korea does not have a currency swap line with the Fed, but it does with the central banks of Switzerland, China, Australia and Canada.
Japan’s central bank also announced a special dollar funding operation on Tuesday.
South Korean vice finance minister Kim Yong-beom said earlier on Tuesday the coronavirus may lead to unprecedented economic and financial crisis for Asia’s fourth largest economy, which is battling the region’s biggest outbreak outside China.
The government has drawn up a $9.8 billion supplementary budget and declared the hardest hit provinces “special disaster zones”, which will get subsidies and tax exemptions.
(This story has been refiled to add dropped word in final paragraph)
Reporting by Cynthia Kim; Editing by Vidya Ranganathan and Sam Holmes