By Seo Eun-kyung and Melanie Lee
SEOUL/SINGAPORE, Nov 24 (Reuters) - South Korea pledged on Monday more action to shore up its flagging economy after the central bank offered up to 5 trillion won ($3.34 billion) for local firms to escape being throttled by a credit crunch.
But deputy finance minister Shin Je-yoon told international financial firms in Singapore that the worst was over for Asia's fourth largest economy, one of the hardest hit in the region by the global financial turmoil and economic downturn.
"There is no possibility for re-emergence of a financial crisis like in 1997," Shin told a the meeting to promote won-denominated treasury bonds and assure investors of South Korea's economic fundamentals.
Foreign investors have been pumping money out of the country, helping cut the won by about 40 percent against the dollar this year and the main share index by almost half.
Shin reiterated that the government would not turn to the International Monetary Fund for help, as it was forced to during the 1997/98 Asian financial crisis, and had ample fiscal room and currency reserves to cope with any cash crunch.
"We have a solid fiscal position. Even in the worst case scenario, we have the ability to address the situation," he said, adding: "The IMF name itself is not good for market sentiment."
Earlier, the central bank agreed at an emergency meeting to contribute up to half of a proposed 10 trillion won fund to buy bonds from local firms to help bring down money market rates.
It also promised to supply more liquidity in a timely manner to help stabilise financial markets.
"We will support the fund as much as possible so that it can function well. With the fund available for troubled companies, we expect the (money market) rates will go down," central bank deputy governor, Lee Ju-yeol, told reporters.
"The Bank of Korea will print the new money to finance its contribution to the fund," he added.
The government plans to set up the fund to buy bonds from companies and banks struggling to raise money as Asia's fourth largest economy grapples with a credit crunch brought on by the global economic downturn.
"I believe that the central bank did its best. It reconfirmed its commitment to the stabilisation of the financial markets," said Kong Dong-rak, a fixed-income analyst at Hana Daetoo Securities.
CLEAR SIGNAL
Kong said the central bank had given a clear signal to the market it was ready to pump more money into bond purchases as the economy slows sharply.
"The central bank's pledge to print new money reflects how severe this credit crisis is," he said. "Fear of an economic recession and deflation is such that the policymakers have opted for extinguishing the fire, rather than worrying about the consequences of a flood of inflation."
The central bank is under mounting pressure to further cut interest rates but made no mention of plans to do so at Monday's meeting. Its next monthly interest rate review is on Dec. 12.
On Sunday, the country's top financial officials said they had additional policy options to cope with the global downturn.
South Korea's top financial regulator proposed the bond fund early this month because domestic bond prices have continued to slide even though the central bank has cut policy rates by a total of 125 basis points in three steps since early October.
The yield on three-year corporate bonds has jumped about 1 percentage point to 8.67 percent over the period of three rate cuts by the central bank.
The central bank will finance the fund by purchasing treasuries directly from the market and repurchasing its monetary stabilisation bonds before maturity.
It will also inject new cash into the financial system via repurchase agreement deals with bonds issued by commercial banks and Korea Development Bank as underlying assets.
With the new funds from the central bank, banks and other financial companies will buy the corporate bonds to give a lifeline to cash-starved firms, including builders. (Additional reporting by Cheon Jong-woo in Seoul, Vidya Ranganathan in Singapore, writing by Jonathan Thatcher; Editing By Keiron Henderson)