SKorea's foreign reserves fall amid credit crunch

South Korea's foreign currency reserves tumbled in October by the largest amount ever, the Bank of Korea said, as authorities dipped into the pool of cash to battle the effects of the global credit crisis.

The reserves totaled $212.25 billion at the end of October, down from $239.67 billion at the end of September, the central bank said Tuesday in a statement.

The decline of $27.4 billion was the biggest for a single month, according to Kwon Joon-suk, an economist at the central bank. At 11.4 percent, it was the largest percentage drop since one of 16.4 percent in December 1997 during the Asian financial crisis.

The decrease came as the central bank expanded dollar liquidity to the South Korean financial system to help calm the effects of the world credit crunch, the Bank of Korea said in the statement. Another reason for the decline in the dollar value of the reserves was non-dollar components such as euros and British pounds weakening against the greenback.

South Korean banks and companies have been scrambling to acquire dollars to meet foreign debt obligations as formerly easily obtained short-term rollover loans have become harder to negotiate.

South Korean authorities, including President Lee Myung-bak, have touted the country's currency reserves as its best weapon in battling the financial turmoil.

As of the end of September the reserves were the world's sixth largest behind those of China, Japan, Russia, India and Taiwan. The central bank statement did not provide a ranking for October.

South Korea's reserves have been declining this year amid speculation the central bank has used them to sell dollars and purchase won to try and support the local currency, which has fallen sharply against the greenback. The reserves fell for a seventh straight month in October for a total drop of $52 billion during that period.

Currency reserves can be wielded for varied purposes, including to defend the value of a country's currency and generally shore up the financial system.

The Bank of Korea's policy is to neither confirm nor deny currency market interventions.

"We suspect that a sizable amount of FX reserves was used for currency market intervention given the heightened volatility in October," Citibank Korea economist Oh Suk-tae wrote in a report Tuesday.

Oh added that the decline in reserves was expected to continue, though at a slower pace, and stabilize at about $200 billion.

October's decline in reserves comes as the Bank of Korea and the U.S. Federal Reserve announced last week a deal for South Korea to get access to up to $30 billion if needed via a currency swap agreement.

The Fed also reached similar agreements with the central banks of Brazil, Mexico and Singapore in a bid to help ease dollar shortages.

Yonhap news agency reported Tuesday that South Korea and China plan to expand an existing swap agreement to between $10 billion and $30 billion.

China's Foreign Ministry in Beijing called the report "incorrect" as did Choi Jong-ku, director general of the international finance bureau at South Korea's Ministry of Strategy and Finance.

The Bank of Korea said in a statement that no specific discussions have taken place with China's central bank.

Choi said the two countries have a $4 billion swap arrangement, which they have agreed to review.

"We have not come up with any specific amount," he said, regarding possible expansion.

Lee, the South Korean president, said Monday that the currency swap deal with the U.S. has greatly reduced fears South Korea could suffer a foreign exchange crisis due to the global financial turmoil.

South Korean financial markets have stabilized since last week. The won closed at 1,288 to the dollar Tuesday, down 2.1 percent from Monday. South Korea's benchmark stock index, meanwhile rose 2.2 percent to finish at 1,153.35, its sixth gain in the last seven sessions.

Still, the won remains 27 percent lower so far this year against the dollar, while stocks have declined 39 percent.

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AP Business Writer Joe McDonald in Beijing contributed to this report.

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