Financial watchdog vows to soothe markets

(ATTN: UPDATES with central bank's response and market reactions in paras 6-14)
SEOUL, Aug. 9 (Yonhap) -- South Korea's financial authorities vowed Tuesday to take measures to stabilize the local financial markets if necessary, urging market players to remain calm.
The pledge came as the Financial Services Commission (FSC) and its executive body the Financial Supervisory Service (FSS) held an emergency meeting to address the market rout sparked by last week's U.S. rating downgrade.
"We will draw up necessary market-stabilizing steps after monitoring financial market situations," the FSC said in a statement.
The financial watchdog also called for market participants to stay calm, saying the recent market turmoil would have a limited impact on the local economy, given the country's sound fiscal status and large foreign reserves.
Financial authorities plan to continue to hold such meetings before the daily market opening until the financial market regains its stability, it said.
The Bank of Korea (BOK), the country's central bank, also said in a report to lawmakers that it will strengthen its monitoring of the financial markets and provide ample liquidity to the financial system if necessary.
"The BOK will closely watch cross-border movements of foreign stock funds and check foreign currency liquidity conditions at local financial institutions," the central bank said.
"The BOK will also expand the supply of local and foreign currency liquidities if market interest rates jump and FX liquidity conditions worsen due to massive foreign capital outflows."
The U.S. credit rating downgrade by Standard & Poor's raised fears that global central banks may decrease the weight of dollar assets in their foreign asset holdings in the short term.
But South Korea said it will not make any significant changes to the amount of its investment in U.S. bonds as they are viewed as "still the most flexible and stable" foreign assets.
"From the mid-and long-term perspective, the central bank's move to diversity its foreign assets will be maintained, but the BOK will refrain from abruptly change portfolios of the foreign reserves," the BOK added. South Korea's foreign exchange reserves reached a record US$311.03 billion as of end-July.
The move came as the Seoul financial markets were jolted by investors' panic selling driven by the U.S. credit downgrade.
The benchmark Korea Composite Stock Price Index (KOSPI) has fallen more than 15 percent since Aug. 2, gripped by fears about a double-dip recession.
The KOSPI crashed as much as 9.88 percent at one point in late morning trade, falling below the 1,700-point level at one point. It tumbled 3.82 percent to a 10-month low of 1,869.45 on Monday on panic selling.
The local currency has depreciated to the dollar for the sixth straight session as global recovery woes revived investors' appetite for safe assets. The Korean won has lost about 3 percent to the greenback since Aug. 2
Global credit rating agency Standard & Poor's cut the U.S. credit rating by one notch to "AA+" from a top-tier "AAA" on Friday, sending global financial markets into a tailspin.
The Group of 20 leading economies pledged on Monday to cooperate closely to tackle market instability, saying that they will take "all necessary initiatives" to support the world's financial stability. But it was not enough to soothe investors' fears about a potential global double-dip downturn.
sooyeon@yna.co.kr