UPDATE 1-S.Korea to discuss c.bank T-bond purchases

SEOUL, Feb 13 - South Korea's new finance minister said on Friday that he would discuss with the central bank the possibility of it buying treasury bonds when necessary.

Yoon Jeung-hyun, who took office on Tuesday, was speaking after being the first finance minister to make an official visit to the Bank of Korea since the 1997-98 Asian financial crisis and a day after the central bank cut interest rates to a new low.

"We will talk about (central bank) purchases of treasury bonds in detail when necessary," Yoon told reporters after meeting Bank of Korea Governor Lee Seong-tae.

The previous day, Lee had signalled the central bank was open to such purchases to help the government soften the fallout of economic contraction this year. [ID:nSEO275931]

A key element to the government's response to the impact of the global downturn is to issue bonds to finance stimulus measures.

It plans to spend a total of 284.5 trillion won ($204.1 billion) this year, about 60 percent of it in the first half to give a boost to sagging domestic demand. It has already announced the planned issue of 74.3 trillion won in bonds this year but economists say the amount is likely to be bigger.

The government's promise of a sizable extra budget on top of the record fiscal budget already set for this year has inevitably put heavy pressure on the local debt market.

And expectations the central bank might absorb some of the paper gave a lift to March Treasury bond futures <KTBc1>, which rose as much as 41 ticks.

"The central bank will have to buy the treasures in the end, otherwise market interest rates will go up again, offsetting its unprecedented rate-cutting campaigns," said Kim Dong-whan, a fixed-income analyst at HI Investment & Securities.

Since early October, the Bank of Korea has so far slashed the benchmark interest rate by a total of 3.25 percentage points. It cut the rate by 50 basis points on Thursday to a record low of 2.0 percent. [ID:nSP415677]

In a statement after the meeting, the finance ministry said the two top policymakers agreed that the current economic crisis required "close cooperation" between the central bank and the government.

They also concurred on the need for "expansion in the fiscal and financial policy weapons" to prevent the nation from slipping into its first recession in a decade.

The finance minister, in his inauguration speech on Tuesday, warned that the economy could contract by 2 percent this year. (Additional reporting by Seo Eun-kyung; Editing by Jonathan Thatcher)