Korea’s Bond Premium Soaring
By Yoon Ja-young
Staff Reporter
Korea carries a higher default risk than Malaysia on global financial markets, with rating agencies placing Korea somewhere between 28th and 33rd in terms of sovereign credit.
According to the Korea Center for International Finance (KCIF), the premium on the country's five-year credit default swap (CDS) stood at 1.84 percentage points as of Oct. 1. In credit default swaps, the buyer that wants to evade risk pays a premium to the seller, in exchange for the right to payout in the case of a default. Hence, the premium goes up if the likelihood of a bond default increases.
Korea's CDS premium has been soaring recently, which means the default risk is also on the rise. The premium, which was around 0.45 percentage points late last year, kept rising to 1.16 percentage points in August, and to 1.84 percentage points last month.
The figure was 0.85 percentage points for China, 1.10 for Chile, 1.46 for Mexico and 1.70 for of Malaysia. The KCIF said that Korea's CDS premium surged amid the global subprime mortgage troubles. The country has been suffering from a lack of short-term liquidity, with financial firms rushing to acquire dollars as the current account deficit expands.
``Korea is seen as facing a liquidity shortage compared with other countries,'' KCIF President Jung Bu-gyun told reporters. However, he said the CDS premium of a country doesn't reflect fundamentals 100 percent. ``Eastern European countries such as the Czech Republic and Poland have sovereign credit ratings lower than Korea's but their CDS premiums are smaller than ours.''
According to the Ministry of Strategy and Finance, Korea's foreign exchange denominated bonds are rated A by global rating agencies such as Moody's, Fitch and Standard & Poor's, meaning the bonds incorporate little risk.
Moody's rates 32 countries higher than Korea, while 24 countries are rated better than Korea in Fitch's ratings. Most European countries, Japan and the United States are rated above Korea. In Asia, Taiwan, Singapore, Malaysia and a number of countries in the Middle East also have better ratings.
An official at the ministry said Korea doesn't have to be too concerned when considering its credit ratings.
However, some doubt whether these credit rating agencies are properly evaluating the risk. They are especially being battered for their slow reaction after the global capital market turmoil that started from the United States. S&P, for example, was heavily criticized by investors for having assigned an A rating on Lehman Brothers' debt when the investment bank filed for bankruptcy on Sept. 15. The United States is still rated at the top by these agencies despite being the source of the global market trouble.