S Korea to ban financial firms from buying Kimchi bonds for local use

15:05, July 19, 2011      

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South Korea will ban financial firms from buying Kimchi bonds issued for domestic use in a bid to curb excessive external debts, the central bank said Tuesday.

Domestic banks, local branches of foreign banks and other foreign exchange financial firms will be prohibited from purchasing Kimchi bonds sold with the aim of converting the foreign-currency proceeds into the local currency, the Bank of Korea (BOK) said in a statement.

When financial firms, which deal with foreign exchange transactions, want to buy the foreign-currency denominated bonds, they are required to check the purpose of sales in advance. If the bonds are sold for local use, financial institutions will not be allowed to invest in the bonds, according to the statement. The move will take effect starting July 25.

After conducting a joint inspection into banks'investments in Kimchi bonds, the BOK and the Financial Supervisory Service (FSS) found local companies used around 70 percent of the proceeds from Kimchi bonds for local use by converting foreign currency into the won.

Kimchi bonds refer to foreign-currency denominated bonds sold by foreign and local companies within the country. The term originally was used only for debts issued by foreign firms, but was later widened to include bonds sold by local firms.

Domestic firms issued Kimchi bonds to benefit from lower borrowing costs in the foreign-currency debt market. The borrowing costs of Kimchi bonds, even after swapping the proceeds into the South Korean won, were lower than those of the won-denominated bonds.

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