The South Korean government has announced a package of measures to stabilise financial markets, including a guarantee of local banks' external debt up to US$100 billion for three years.

The finance ministry and the Bank of Korea will also provide an additional $30 billion directly into the banking sector by using foreign exchange reserves.

The announcement was made after top economic policymakers and the ruling Grand National Party agreed yesterday (October 19) on the measures aimed at helping the country overcome the global credit crunch.

"As other major economies start providing guarantees on inter-bank loans, the Korean government will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market," finance minister Kang Man-soo said in a statement. Bank of Korea governor Lee Seong-tae and Financial Services Commission chairman Jun Kwang-woo also signed the statement.

"The government will pursue market stabilisation policies in a preemptive, decisive and sufficient manner to minimise the total cost of implementing the proposed measures," Kang said. According to the measures, local banks and their branches, which borrow dollars overseas from today to June 30, 2009, will have their debt guaranteed for three years.

Initially, the state-run Korea Development Bank or the Ex-Im Bank of Korea will provide guarantees until the government's proposal is approved by the National Assembly.

After approval, the government will directly guarantee external debt.

The total value of foreign debt guarantees by June next year is estimated to reach $100 billion, while local lenders' external debt reaching maturity until the end of June next year is to be around $80 billion, government officials said.

Kang said the recent decision of Australia to guarantee overseas borrowings motivated Korea to take similar actions, citing increasing competition for dollars in global financial markets.

"After Australia announced the decision, credit spreads (of Australian banks) went down to a lower level than ours," Kang told reporters.

Jun of the FSC said that neither recapitalisation of banks nor an expansion of deposit guarantees are necessary for now, because local lenders' BIS ratio and balance sheets are healthy.

"But we are preparing to take action on recapitalisation and expansion of deposit guarantees (if necessary). The government is discussing them internally," Jun said.

The central bank will further provide won liquidity as well by purchasing repurchase agreements, government bonds and redeeming monetary stabilisation bonds earlier.

Amid global market turbulence and jittery investment sentiment, stock markets around the world have plummeted in recent weeks.

To encourage investors to stay calm and to divert more funds into the local stock market, the government will provide tax incentives for long-term holdings of funds.

Specifically, those who hold equity-type funds for more than three years will see their taxes reduced and be exempt from tax on stock dividends income, officials said.

"We expect an additional 10 trillion won ($7.63 billion) will flow into the stock and bond market after the action. The tax incentives will be available as early as tomorrow," Jun said.

The government will inject 1 trillion won ($9.82 billion) into the Industrial Bank of Korea to expand loans to small- and medium-sized enterprises, they said.