Rattled S.Korea bans shorting stocks, c.bank to defer rate hikes

SEOUL (Reuters) - South Korean authorities banned short selling of shares on Tuesday in a bid to stem losses on a stock market that has lost 17 percent or almost $200 billion in value in the past six trading days amid a global market rout. The move came as state funds stepped in to try and shore up local share prices and after the Bank of Korea appeared to suggest that interest rate hikes were off the agenda when it meets on Aug. 11, as the market turmoil added a fresh threat to already sputtering global growth. Bans on short-selling - the sale of securities borrowed from a broker with the intent of buying them back later - have been frequent since the 2008 global financial crisis, but have been criticised for not achieving their aims and for reducing market liquidity. "Banning short-selling always smells of desperation and will not solve the underlying problems. Obviously one can understand the authorities worry, but I doubt that this will have any lasting positive impact on the markets," said Lars Christensen, head of emerging markets research at Danske Bank. Greece on Monday banned short-selling on the Athens bourse for two months as it tried to stem a stock market slump. Tuesday's announcement from South Korea's Financial Services Commission that short selling would be banned for three months came after it said short selling, mainly by foreign investors, hit a record high of 432.8 billion won on Aug. 3. "Short-selling triggered market instability," the regulator said in a statement after the stock market closed. Any further selloffs in the Korean stock market could feed directly into the real economy. Many ordinary investors have borrowed heavily to buy stocks and shares in a country where households are among the most heavily indebted of all major industrial nations by some measures. "It is kind of a double whammy on household debt and retail activity," said a Singapore-based analyst at an investment bank whose firm's policy does not allow him to be quoted by name. The main Seoul stock index finished down 3.6 percent at 1,801.35 points on Tuesday, its weakest close since Sept. 9, 2010, after tanking as much as 9.9 percent. In the past six trading days it has lost 209 trillion Korean won ($193 billion) in market value. BANK OF KOREA APPEARS TO RULE OUT RATE HIKE Bank of Korea Governor Kim Choong-soo told parliament on Tueday that the global market turmoil prompted by the U.S. debt downgrade and Europe's debt crisis meant that plans for "normalising" or raising interest rates had been put on ice. The central bank has been criticised for not raising interest rates fast enough to combat inflation, which surged to 4.7 percent year-on-year in July, well above 4 percent, the top end of its target range. "Before this situation, (the Bank of Korea) had been in a position towards normalising interest rates," Kim Choong-soo told a group of lawmakers in a parliamentary session. "Financial markets have changed rapidly since August 5. We will make an appropriate decision the day after tomorrow." The Bank of Korea has hiked its key rate five times since last July to 3.25 percent, still well below the headline rate of inflation, and has gone against market expectations in four out of six of its rate decisions. A Reuters poll of economists published on Tuesday showed the market expected the policy rate to remain on hold on Thursday. "Now financial markets are so volatile they cannot help but hold interest rates this Thursday," said Kim Yoon-gee, head of Daishin Economic Research Institute.