Default risk tied to Korean debt drops

Korea’s credit default risk has dropped to levels not seen since before the 2008 financial crisis erupted, reflecting the country’s strong economic fundamentals, data showed yesterday.

The credit default swap (CDS) premium on the country’s five-year Treasuries came to 65 basis points as of Friday, the lowest in more than four years since the 64 basis points tallied in May 22, 2008, according to the Korea Center for International Finance (KCIF).

The spread on CDS reflects the cost of hedging credit risks on sovereign or corporate debts. 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 figure spiked to as high as 699 basis points on Oct. 27, 2008, in the aftermath of the U.S. Lehman Brothers collapse, which sparked the global financial meltdown.

The CDS premium hovered around 85 basis points in early October but dropped more than 20 basis points within a month following consecutive sovereign rating upgrades on Korea by global appraisers including Moody’s Investor Service.

No further aggravation of the euro zone debt turmoil and waning fears over a hard landing of the Chinese economy have given relief to the global market, according to market watchers.

“The overall CDS premium for Asia dipped on eased concerns over the China factor. We could expect the CDS premium for Korea to drop to as low as 30-40 basis points in the long term,” said Yoon In-gu, a KCIF economist.

Other credit risk barometers also showed a sharp decline. The spread on foreign exchange stabilization bonds due in 2019 fell to 38 basis points, the lowest since 2009. The yield refers to the return on the Korean Treasuries that are added to the U.S. government bonds in the global financial market, a gauge of the sovereign credit. It gets lower as the sovereign risk wanes.

“A fall in the risk premium means favorable conditions for the local bond market, as it can lure more investors from abroad,” said Lee Seung-hoon, an analyst at Samsung Securities. Meanwhile, the CDS premium for Korea on Oct. 2 was lower than those for Japan and China, which stood at 73 and 66 basis points, respectively, according to KCIF data.

Yonhap