, SEOUL, October 19 – South Korea moved to shore up its banks on Sunday, adding to global efforts to tackle the worst financial crisis since the Great Depression, which has ravaged stock markets and economies around the world.
The government announced a 130-billion-dollar finance package, including a guarantee for the offshore debt of domestic banks, aimed at maintaining stability and keeping Asia’s fourth-largest economy away from recession.
The announcement came hours after US and European leaders announced they will hold a series of summits to address the crisis, starting soon after next month’s US presidential election.
US President George W. Bush, French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso said after meeting in the United States that the first summit would look at reforming the financial system.
Sarkozy has been urging a broad overhaul of the so-called Bretton Woods system of international finance and commerce put in place during World War II, and pushing to make sure there is no repeat of the current crisis.
"We must avoid at all costs that those who have led us to where we are today should be allowed to do so once again," he said.
Critics say the institutions sketched out after the Depression — the World Bank and International Monetary Fund — are ill-equipped to deal with the globalised economy and the complexities of modern finance.
The current crisis began with high-risk or subprime US home loans last year. The loans, repackaged as complex investment instruments loosely known as derivatives, were resold to investors and banks around the world.
When people defaulted on those loans, it set off a chain reaction through the financial system, eventually leaving banks short of cash and hesitant to make the inter-bank loans essential to the system’s smooth functioning.
Sarkozy and other European leaders have suggested greater international oversight of the financial system, a move Bush said should be treated with caution.
"As we make the regulatory and institutional changes necessary to avoid a repeat of this crisis, it is essential that we preserve the foundations of democratic capitalism — the commitment to free markets, free enterprise and free trade," he said.
"We must resist the dangerous temptation of economic isolationism and continue the policies of open markets that have lifted standards of living and held millions of people escape poverty around the world."
Nations across the globe have taken emergency steps to rescue banks and restore confidence during the current crisis, and South Korea became the latest to do so with its bank guarantee plan on Sunday.
"We have to do our best to tide over the financial crisis and stop an economic slump," Prime Minister Han Seung-Soo said.
His government offered up to 100 billion dollars in guarantees for bank borrowings in foreign currencies, and a 30 billion dollar injection into the banking system.
Despite foreign reserves of almost 240 billion dollars, South Korea was seen as vulnerable to the current turmoil because of a surge in short-term foreign borrowing by its banks in the past year as US interest rates fell.
The credit crunch was complicating efforts to roll over those loans, causing a scramble for dollars and a plunge in the value of South Korea’s currency, the won, which has fallen around 40 percent against the dollar this year.
The worldwide crisis has been compounded by an economic slowdown and fears of a widespread recession — broadly defined as when economies are in a decline for two consecutive quarters.
Stock markets worldwide have taken a battering this year. There was more bad news from the United States as data showed starts on new US homes slumped 6.3 percent in September to the lowest level since the recession in 1991.