By Kim Jae-won
Premiums for Korea’s bonds in overseas markets hit a 14-month high following the U.S. credit downgrade, a state-run think tank said Tuesday.
According to the Korea Center for International Finance (KCIF), the credit default swap (CDS) premium for Korea’s 5-year sovereign bond was traded at 138 basis points as of Tuesday afternoon in the Hong Kong market, up 21 points from Friday demonstrating how the export-driven economy is vulnerable to global turbulence.
The CDS premium is an annual amount of protection the buyer must pay the protection seller over the length of the contract, expressed as a percentage or basis point of the notional amount. If the CDS premium of a country is 50 basis points, or 0.5 percent, then an investor buying $10 million worth of protection from a bank must pay the bank $50,000 per year.
“Anxiety is spreading to other sovereign bonds as the credit rating of U.S. bonds, once regarded as the safest asset, was downgraded,” said Kim Yoon-kyung, a senior economist from the KCIF.
In a never before event, Standard & Poor lowered the U.S. credit rating by one notch from triple-A to AA+ Friday doubting America’s ability to manage its deficit.
But, the situation is not too worrisome at least now because it is still less than one fifth of the level of the financial crisis three years ago, Kim said. Korea’s CDS premium spiked to 700 basis points when the Lehman Brothers incident hit Korea in late 2008.
Korea’s CDS premium rose relatively higher than other countries, Kim said, but added that other Asian countries, such as China, Indonesia and the Philippines saw their CDS premium climb similarly. China’s CDS spread rose 15 basis points to 113 as of Tuesday afternoon from Friday, while that of Indonesia hiked by 30 to 174 during the same period.
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