Korea's shopping binge has stored up problems

State-run Korea Development Bank (KDB) has offered to cover additional losses at LG Card after creditors were unable to agree who should be responsible.

One-third of South Koreans hold LG Card plastic, but their failure to pay off loans has left the credit-card firm in debt and in need of a bailout.

The government has said its collapse "would be a disaster".

Confidence at risk

The breakthrough, after weeks of negotiations, was due to an agreement from conglomerate LG Group, that it would shoulder a majority of future losses at its credit-card unit.

LG Card blocked customers from making cash withdrawals on Thursday, the second time it has taken this step in just over three months.

The last time was in November 2003, shortly before it negotiated a rescue package of 2 trillion won ($1.7bn).

Government officials have been worried that any collapse of LG Card would damage the country's financial sector.

LG Card's total debt amounts to 21 trillion won.

The collapse of such a well-known lender would dent confidence among ordinary Koreans, who are once again enjoying relatively good economic times after the painful years of the Asian financial crisis and the 2001-02 recession.

Credit-card-fuelled consumer spending played a significant role in South Korea's economic recovery but left a legacy of bad debt.