SEOUL - SOUTH Korea's central bank said on Monday it would supply up to five trillion won (S$5.17 billion) in liquidity for a planned fund to stabilise the local bond market.

The watchdog Financial Services Commission this month announced plans to create a 10 trillion won fund to ease a corporate funding squeeze.

The Bank of Korea (BoK) said it would take part in the fund by printing fresh money and buying treasury bonds via repurchase agreement operations, as well as buying back monetary stabilisation bonds from banks and financial firms.

'The liquidity support for the fund is aimed at helping to smooth liquidity flow in the corporate bond and commercial paper (markets),' BoK deputy governor Lee Ju-Yeol told Dow Jones Newswires.

The fund was designed to ease the credit crunch by purchasing bonds, with banks, insurers, brokerages and pension funds set to contribute.

But local treasuries have dropped sharply on expectations that financial institutions may face intense pressure to sell their bond holdings to contribute to the fund, triggering a sell-off led by foreign investors.

The central bank's recent steep rate cuts have done little to bring lending rates down as banks continue to suffer from a liquidity squeeze.

South Korea has announced a series of steps to lessen the effect of the global slowdown, including US$16 billion in loans to ease a dollar shortage for firms importing raw materials and exporting goods.

But private banks have been increasingly reluctant to extend loans, especially to smaller firms, as credit dries up while the export-led economy slows down.

Corporate bankruptcies hit a three-year high in October. -- AFP