(Updates throughout)
By Cheon Jong-woo and Kim Yeon-hee
SEOUL, Nov 27 (Reuters) - South Korea readied fresh moves on Thursday to help protect its banks from the havoc of the global financial crisis and said it would tap a $30 billion swap line with the U.S. Federal Reserve to bring in hard-to-find dollars.
The measures come as the country's main business lobby group warned that the outlook for major firms was the worst in 11 years because of the difficulty in borrowing from increasingly tight-fisted banks and weakening markets.
"The economic slump is more serious than has been thought," the Korea Economic Daily quoted an unidentified senior official as saying in a story that the government planned to put up money to bolster banks' weakening capital base -- something other countries have done but an idea which so far Seoul had rejected.
But Deputy Finance Minister Noh Dae-lae told Reuters it was too early to discuss such a move.
"It is not the time to discuss government support for bank capital," he said.
The government announced it was considering buying bad debt from banks to help them clean up their balance sheets and start lending again to business, which is in danger of being throttled by a shortage of funds.
South Korean's banks have been especially hard hit by the global downturn because of their reliance on short-term credit markets and have become more and more reluctant to risk loans to local firms souring as the economy fast loses strength.
Moves to improve liquidity at home and globally-inspired renewed appetite for bank shares -- for months among the market's worst performers -- lifted the sector's sub-index almost 8 percent, well ahead of the main index rise of 3.3 percent.
BUY BAD LOANS
The state debt clearing agency, Korea Asset Management Corp (KAMCO), said it was considering boosting its own capital to give it more room to buy bad loans off banks next year.
A KAMCO official said the agency expected to spend 1 trillion won ($676.9 million) buying soured loans from banks and mutual savings banks this year, the same as in 2007.
The central bank announced it would tap its $30 billion credit line agreed with the Fed in October to inject $4 billion into the banking system via an auction on Dec. 2.
The Bank of Korea has spent $10.2 billion so far since October to supply foreign currency liquidity to credit-strained local traders through swap deals, depleting its foreign reserves.
The won
The measures are the latest in a string of moves by the authorities to fend off a crisis that is tipping the developed world into recession, has toppled banks from the United States to Iceland and forced several nations to seek help from the International Monetary Fund.
President Lee Myung-bak and other top officials have said that the government needed to offer wide-ranging measures, even if it did mean running a budget deficit, to stimulate the economy, which some analysts are now predicting could go into recession next year.
Lee held talks with his own conservative ruling party to try to heal a rift with some of its leaders, which has delayed reforms that would help Asia's fourth largest economy better ride out the financial crisis.
In a sign of the damage the financial market turmoil has caused, the country produced a record capital account deficit in October of $25.5 billion, largely the result of losses on foreign exchange contracts, the central bank said.
The current account swung into a surplus for the first time in four months to reach its highest level in almost four years, but at $3.41 billion did little to offset the hit on the capital account. The surplus is expected to narrow to some $1 billion in November with falling commodity prices helping offset weakening exports. (For South Korea's measures see FACTBOX [ID:nSEO29153]) (Additional reporting by Seo Eun-kyung, Lee Shin-hyung and Lee Chang-ho, Writing by Jonathan Thatcher; Editing by Tomasz Janowski)