Korea's credit default risks fell to their lowest level in 21 months following Fitch Rating's upgrade of its sovereign rating that reflects the country's fiscal and economic soundness, industry data showed Friday.
The credit default swap (CDS) premium for the country's five-year currency stabilization bonds slipped to 91 basis points in New York trading, down 8 basis points from the previous day and the lowest since the 88 basis points tallied on Dec. 24, 2010, according to the data by the Korea Center for International Finance.
The spread on CDS reflects the cost of hedging credit risks on sovereign or corporate debt. A steep rise indicates a deterioration in the credit of government bonds and higher costs for bond issuances. A basis point is 0.01 percentage point.
The fall on the CDS premium came a day after Fitch Ratings raised South Korea's sovereign credit rating by one notch to "AA-" from "A+", the fourth-highest rating on its rating scale.
Fitch's decision came on the heels of the recent rating upgrade by Moody's Investor Service, which also raised South Korea's sovereign rating by one notch to "A1" in August.
The CDS premium of Asia's fourth-largest economy stood at 107 basis points on Aug. 24, before falling to 104 basis points upon Moody's announcement.
The sharp decline in the gauge of credit risks is also attributable to the decision the European Central Bank (ECB) made overnight to purchase government bonds of fiscally vulnerable nations in the eurozone.
A stronger indication from the ECB that it will sort out the region's debt mess sent the CDS premium of China, Spain and France sliding, the KCIF said.
A series of sovereign upgrades by global credit rating agencies have lowered Korea's credit default risks to below that of China. Korea's CDS premium gap also narrowed to only 10 basis points.
"South Korea's default risks are becoming slimmer compared with China and Japan," a KCIF official said, adding "it will likely boost demand for Korean bonds among international investors."
It is the first time in 15 years that Korea has regained an "AA-" rating, which is on par with Saudi Arabia and a notch higher than China and Japan.
Fitch's rating upgrade is widely seen as mirroring Korea's strong macroeconomic fundamentals, including fiscal discipline, and financial stability amid the eurozone debt crisis and other external uncertainties.
According to a report by the International Monetary Fund, Korea's ratio of national debt to gross domestic product reached 34.1 percent last year, compared with Japan's 229.8 percent.
Although the Korean economy is losing steam in the wake of a global economic slowdown, the Bank of Korea (BOK) expects Asia's fourth-largest economy to grow 3 percent this year. The government has forecast a 3.3 percent expansion.
The upward adjustment of South Korea's sovereign credit rating is also underpinned by its banking sector's improved ability to borrow from overseas and its large foreign exchange reserves.
The refinancing rate of 12 local banks' mid and long-term foreign debts came to 168.1 percent as of end-July, up from 77 percent the previous month.
The roll-over rate measures the percentage of fresh overseas borrowing against foreign debt that matures after one year. A refinancing rate of more than 100 percent indicates local lenders have acquired more fresh foreign loans instead of refinancing their maturing foreign debts.
Korea's foreign reserves reached $316.88 billion as of end-August, up $2.53 billion from the previous month. As of end-July, Korea was the world's seventh-largest holder of foreign exchange reserves.
But market watchers predict that Korea's large household debt could emerge as a drag on its sovereign credit rating down the road. Household lending by banks and non-bank depositary institutions totaled 645.9 trillion won ($571 billion) as of the end of June, up 8.7 trillion won from three months earlier. (Yonhap)