Stocks and bond prices gave an initial thumbs-up to the package, with the KOSPI index soaring over two percent on Thursday morning and bond yields retreating.

The Financial Supervisory Commission (FSC) said the government would purchase non-guaranteed bonds issued by Daewoo Group and inject public funds into investment trusts as part of its latest package to stabilise the country's financial markets.

The eagerly awaited stabilisation package came as the FSC revealed that a due diligence study finished this week on the 12 Daewoo units showed combined debt of 86.8 trillion won ($73.1 billion) outweighed assets of 61.2 trillion won ($51.6 billion).

At the end of June, Daewoo listed their book value assets at 91.9 trillion won with debts at 77.8 trillion, it said.

South Korea's second largest conglomerate is undergoing dismemberment at the hands of its local creditors in what foreign bankers have described as one of the largest and most complex corporate debt workout programmes ever attempted.

The country's financial markets have swayed with every fresh whiff of news about the conglomerate, which has nearly a dozen companies listed on the local exchange and whose commercial paper has been a dead weight on the debt market for months.

Government unveils stabilisation package

The FSC said Korea Asset Management Corp (Kamco), a holdingfirm for bad bank assets, would buy non-guaranteed bonds issued by Daewoo companies, paying either in cash or with its own bonds.

The government would also inject public funds into Seoul Guarantee Insurance Corp, which guaranteed 9.5 trillion won worth of Daewoo bonds, if necessary, the financial regulator said.

The FSC said it estimated financial institutions' losses stemming from Daewoo Group restructuring at 31.2 trillion won.

"Although we believe the actual figure may be smaller than this amount, we used the worst-case scenario for the losses in order to establish the best stabilisation measures," the FSC said.

The FSC also said the central bank would buy government and government agency bonds held by cash-strapped investment trusts upon request and through repurchase agreements.

It said the government and state-run banks would inject two trillion won into Korea Investment Trust and one trillion won into Daehan Investment Trust.

The FSC reaffirmed the bond market stabilisation fund would buy an unlimited amount of bonds from trusts by selling its existing holdings to banks and other financial institutions.

Stocks up, yields ease on news
South Korean stocks closed the morning at 901.63 points, up 1.63 percent. But banking and Daewoo shares declined after news of the bearish financial data on the Daewoo firms.

Major bond yields were down by midday, though dealers said market sentiment was turning bearish as a closer examination of the stabilisation fund showed they fell short of market expectations and lacked detail.

The financial regulator said the 12 Daewoo firms should be able to finalise the workout plans in November. Creditors have drawn up blueprints for six firms, but plans for the remaining six need to be sorted out.

The FSC also said it expected creditors and the 12 firms to sign workout pacts by the end of this year.

It said the recent due diligence study showed trading and construction arm Daewoo Corp having the largest negative net worth, 14.5 trillion won.

The FSC said it could not rule out the possibility ofseeking court receivership for Daewoo Corp due to its sizeable debts if foreign and local creditors could not agree on restructuring plans.

The regulator said it would try to persuade foreign creditors, which hold $5.1 billion of Daewoo Group's debts, to join the workouts. Foreign creditors last week balked at Daewoo's request for a debt freeze, insisting they be consulted on the plans.