* Will mull appropriateness of banks’ forex debt ratings

* Unlikely to lower banks below S.Korea’s A2 rating

* Has not changed outlook on S.Korea’s rating

(Update with details, background)

By Rafael Nam

HONG KONG, Jan 15 (Reuters) - Moody’s may downgrade 10 South Korean banks whose foreign currency debt ratings are above the country’s sovereign rating, saying the higher ratings were inappropriate given they rely on the government to secure external funding.

Beleaguered South Korean lenders have struggled to raise dollars since the global financial crisis pummelled the domestic won currency KRW= as their high debt spreads make it costly for them to tap overseas markets.

Moody’s is the only of the three major credit ratings agencies -- the others being Standard & Poor’s and Fitch -- to currently assign a higher rating for some South Korean banks than the country’s sovereign rating.

Moody’s Investors Service also noted it was unlikely to lower the banks below South Korea’s current A2 rating, the sixth-highest investment grade rating. It said it had not changed its outlook on South Korea’s own rating.

“The review will consider the appropriateness of the banks’ foreign currency debt ratings vis-a-vis the Korean government’s given the banks’ heavy dependence on government support to secure external funding during this crisis,” Moody’s said in a statement on Thursday.

Korea Development Bank (KDB), which was included in Moody’s list, was due to sell at least $1 billion in dollar bonds as early as next week.

Those plans are now “up in the air”, according to a source with direct knowledge of the situation.

State-owned KDB is rated Aa3 by Moody’s, or two notches above South Korea’s sovereign rating.

Among the lenders affected is another government-owned company, Export-Import Bank of Korea (KEXIM), which sold $2 billion in five-year bonds on Monday.

South Korea last month said it would make available a 20 trillion won ($14.63 billion) fund to recapitalise banks.

The finance ministry has said it expects banks to be able to roll over all their external debt due in the first half of 2009, helped by government and central bank plans to supply a combined $55 billion in foreign currency liquidity to money markets.

South Korea has $200 billion in foreign exchange reserves and also has a U.S. Federal Reserve credit line of $30 billion sealed in October, as well as swap lines with Japan and China.

Major South Korean banks have $8.9 billion in G3 currency denominated bonds and loans maturing in 2009, according to BNP Paribas. G3 refers to dollars, euros and yen.

Commercial lenders were already facing tough odds in raising money overseas after their bond spreads surged since the crisis.

The cost of insurance protection against a default in Kookmin Bank’s senior debt, for example, is trading at 380 basis points as measured by its credit default swap (CDS).

That is 50 bps higher than South Korea’s sovereign CDS spread even if the country’s biggest lender is rated two notches higher by Moody’s.

“We believe it may be inappropriate to rate banks’ foreign currency obligations higher than their government’s ability to access the necessary foreign exchange,” said Moody’s in a statement earlier on Thursday explaining its reasoning.

“That ability is, we believe, a function of their government’s capacity to repay its own foreign currency debt and can therefore be measured by the government’s foreign currency debt rating.”

Other lenders included among Moody's potential downgrades are Citibank Korea, the local unit of Citigroup C.N, along with Hana Bank, Industrial Bank of Korea 024110.KS, Kookmin, and National Agricultural Cooperative Federation.

Shinhan Bank, Woori Bank and Woori Finance Holdings 053000.KS are also affected, Moody's said. (Editing by Anshuman Daga and Andrew Macdonald)