Oct. 16 (Bloomberg) -- South Korea's sovereign credit rating outlook is stable, Standard & Poor's said, adding it may reassess the situation if pressure on banks' liquidity and the nation's currency persist.

``It's not necessary for us to be too alarmed,'' Takahira Ogawa, a Singapore-based director of sovereign ratings at S&P, said in a phone interview today. ``If you look at the fundamentals, the credit rating is valid.''

The won slumped today by the most since the International Monetary Fund provided an emergency loan to South Korea in 1997, and the Kospi stock index plunged 9.4 percent, the biggest one- day drop since September 2001. Ogawa says the won's weakness is ``irrational'' given the state of Asia's fourth-largest economy, which is in its 10th consecutive year of expansion.

``If the situation goes on for a long time and the Korean system is exposed to selling pressure on the won and in terms of liquidity, then domestic interest rates will go up,'' Ogawa said. ``That could hurt the economy.''

South Korea has a long-term foreign-currency sovereign rating of A, the sixth-highest investment grade, from Standard & Poor's. The New York-based company most recently raised the Asian nation's rating by one grade in July 2005.

Declines in the country's equities and currency echo similar slumps in emerging markets worldwide as the financial turmoil prompts investors to avoid assets in more risky markets. Overseas investors have sold a net 30.7 trillion won ($23.3 billion) of South Korean stocks this year.

Hitting Everywhere

``The global financial crisis is hitting every country, not just South Korea,'' said Oh Suk Tae, an economist at Citigroup Inc. in Seoul. ``We may get our ratings cut if things like today carry on for a month, but then all other countries' ratings will have to go down too.''

During the Asian financial meltdown a decade ago, S&P slashed South Korea's credit rating by 10 grades between October and December 1997, according to data compiled by Bloomberg.

The nation's long-term rating was cut in 1997 to as low as B+, four levels below investment grade. South Korea needed a $57 billion loan from the IMF at the time to repay overseas debt.

``At this stage, we don't think the speculation will damage Korea's sovereign rating, but there is a possibility, although that possibility may be small,'' Ogawa said.

Korea's short-term debt is equal to 76 percent of foreign reserves, which is ``the most vulnerable in Asia'' as the nation's current-account deficit widens, Brown Brothers Harriman & Co.'s strategist Win Thin wrote in a note to clients. The ratio topped 250 percent during the 1997-98 crisis.

Government Aid

The plunge in the nation's stocks and currency has increased pressure on policy makers to provide finance companies with emergency funds. S&P, in a report on the Asian banking industry yesterday, said Korean banks face a more than 50 percent chance that the global credit crunch could threaten their foreign-currency funding.

Countries in Europe, along with Hong Kong and Australia, have guaranteed the debt banks issue to fund lending as the financial crisis deepened, putting Korean lenders at a relative disadvantage. Kang Chung Won, Kookmin Bank's chief executive officer, this week urged the government to guarantee interbank lending.

Overseas financial institutions including HSBC Holdings Plc, Deutsche Bank AG and JPMorgan Chase & Co. are reducing their credit lines for South Korean banks, the Seoul Economic Daily reported today, citing financial industry officials it didn't identify.

South Korea has a long-term foreign-currency sovereign rating of A2, the sixth-highest investment grade, from Moody's Investors Service, and a rating of A+, the fifth-highest investment level, from Fitch.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

Last Updated: October 16, 2008 05:47 EDT