Spread on banks’ short-term overseas debt rising

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Spread on banks’ short-term overseas debt rising

Korean banks’ short-term overseas borrowing rate rose marginally in May on persistent euro zone fiscal woes that affected financial markets around the world, the financial watchdog said yesterday.

According to the Financial Supervisory Service (FSS), the spread on short-term foreign borrowing by local banks stood at 17.1 basis points, up 8.2 basis points from April. A basis point is 0.01 percentage point.

“The spread is on par with this year’s average of 17 basis points, which has remained stable,” said the FSS.

He said last month’s gain reflects concerns surrounding Europe’s long-drawn fiscal troubles, in particular the possible exit of Greece from the 17-member euro monetary union.

“The gain has little to do with Korea’s economic health and conditions surrounding its banking sector, and should exert almost no impact on foreign borrowing by local lenders,” the official claimed.

The spread on mid and long-term foreign borrowing on debt that matures in five years dropped from 216 to 165 basis points in the space of a month, according to the FSS.

The regulator said local banks refinanced 79 percent of their maturing short-term foreign debts through fresh borrowing last month, compared with 95.5 percent in April.

The rollover rate gauges the percentage of fresh overseas borrowing against foreign debts that mature in one year or less. A refinancing rate of more than 100 percent means local lenders have acquired more fresh foreign loans rather than refinancing their maturing foreign debts.

The refinancing rate of local lenders’ mid and long-term foreign debts stood at 249.9 percent, up from 68.9 the month before.

Meanwhile, the regulator said that overall overseas borrowing and lending rates remained stable despite euro zone woes that have affected Spain and Greece. Korean banks should not have much difficulty acquiring short-term foreign exchange liquidity for the moment, it said.

But the FSS said there is a need to keep tabs on Europe’s fiscal troubles and conduct stress tests to ensure the local financial market is not affected. It added that more efforts will be made to secure long-term funding so the country has plenty of liquidity.

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