With its currency ravaged, its stocks mauled in a flight of foreign money and red flags raised over the stability of its largest banks, South Korea has unveiled a $130 billion (£75 billion) effort to win back the confidence of markets.

Yet Korean banking sources gave warning of a potentially devastating crisis for hundreds of the country's exporters sitting on billions of dollars of so-called “knock-in knock-out [Kiko]” currency hedging contracts. Signed last year before the value of the Korean won fell by 40 per cent, and essentially betting that the local currency would rise against the dollar, the accumulated Kiko losses are expected to drive some companies to bankruptcy, forcing the already troubled Korean banks to assume the cost of those collapses.

Yesterday's confidence-boosting gambit by the Government, which analysts believe will be received positively by investors and is likely to be followed by further economic stimulus measures for the construction sector this week, comes in the form of a $100 billion state guarantee on the foreign borrowings of Korea's banks.

As an additional part of the package, the Bank of Korea said that it would draw down $30 billion from its hefty foreign reserves to help to alleviate the “dollar drought” that has battered the won.

There will also be tax breaks to entice long-term investors back to Seoul's devastated stock market and a $750 million cash injection for the state-run Industrial Bank of Korea to provide loans for cash-starved small businesses.

The package was announced after weeks of mostly fruitless “verbal intervention” to calm market nerves and strenuous denial by the Korean authorities that the country's banking system was especially vulnerable to the global credit crunch.

Throughout that time, analysts have said that the high leveraging of Korea's private sector and the banks' heavy reliance on short-term foreign borrowings made it significantly more fragile than other Asian financial systems. The Korean authorities have pointed consistently to their $240billion in foreign exchange reserves as cause for the markets not to panic. Many billions have already been ploughed into efforts to shore up the won amid rising inflation this summer.

Because about 12 per cent of the Korean banking sector is funded by the wholesale debt market, the near-total dysfunction of those markets since September has raised concerns that the Korean banks will encounter problems rolling over those loans. Such fears were stoked last week when Standard & Poor's said that it might downgrade its credit ratings on seven of the country's largest financial groups.

In a statement that accompanied yesterday's market-calming package, the South Korean Strategy and Finance Ministry said that the measures were part of international efforts to combat the financial meltdown, but again insisted that “despite the recent credit crisis, Korea's real economy and its financial sector are sound”.

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