By Kang Seung-woo
The cost of insuring Korea’s sovereign debt against a default rose dramatically in September, according to a state-run think tank Sunday. The heightened uncertainty surrounding the eurozone debt problems and the sluggish U.S. economy continue to fuel uneasiness about Korea’s financial stability.
The credit default swaps (CDS) premium on Korea's five-year foreign currency bonds, which reflects the cost of hedging credit risks on sovereign debt, closed at 219 basis points on Friday, up 91 basis points from Aug. 31 and 24 basis points from the previous day.
The latest figure represents the highest level since 246 basis points posted on May 1, 2009, and the largest one-month jump since October 2008, when the rate leapt nearly 100 basis points following the collapse of the Lehman Brothers, the Korea Center for International Finance (KCIF) said. A basis point is 0.01 percentage point.
Credit default swaps are derivative contracts traded on the over-the-counter market that work as insurance to protect lenders against loan defaults. The more concern market players have over the potential default of a country’s debt, the higher the CDS figures become.
The surge in Korea’s CDS premium is attributed to the ongoing global financial turmoil sparked by the debt crisis in Europe. The KCIF warned that the CDS premium on Korean bonds could rise further as it looks like it will take more time for international financial markets to regain a sense of stability.
Korea’s CDS spread was higher than the 187 basis points for France, the second-largest economy in Europe that is could be facing financial troubles. Korea’s CDS spread first surpassed that of France by 3 basis points on Aug. 22 and has maintained the lead since then. Korea’s CDS spread reached a record 699 basis points on Oct. 27, 2008.
The KCIF expects that Korea’s CDS premium will continue to climb due to ongoing uncertainties in the global financial markets. The think tank said that downward trend in credit rating of government debt outnumbered the upward movement during the third quarter of 2011. It also predicted more European countries to see their credit rating shaved for the remainder of this year.
In the first three months of the second half, there were 14 countries, including the United States, Japan, Italy and Ireland, suffered a credit downgrade, while 12 countries, including Israel, Peru and Uruguay, had their ratings improved by global credit agencies. Spain, Italy, Slovenia, Belarus, Kippurs and Portugal are among the countries that could see their credit ratings downgraded in the coming months, according to the KCIF.
Among local companies, POSCO Engineering and Construction suffered a downgrade by Moody’s, which also lowered the outlook of strike-stricken SC First Bank from stable to negative.