Korea’s rating upgrades see credit default risks improve

Korea’s credit default risks fell to their lowest level in nearly five years on the back of the recent sovereign rating upgrades by global appraisers, data showed yesterday.

The credit default swap (CDS) premium on Korea’s foreign currency bonds with five-year maturities stood at 59 basis points Friday on the New York market, down 9 basis points from earlier this month, according to the Korea Center for International Finance (KCIF). A basis point is 0.01 percentage point.

The risk premium returned to the 50-point mark for the first time since 58 basis points tallied on Jan. 11, 2008, a few months before the global financial crisis following the collapse of U.S. Lehman Brothers.

The spread on CDS reflects the cost of hedging credit risks on corporate or sovereign debt. A steep rise indicates deterioration in the credit of government bonds and higher costs for bond issuances.

Market watchers said the decline in the country’s credit default risks is attributable to upgrades in the credit ratings of Asia’s fourth-largest economy.

“The spread on CDS declined as the country’s fiscal soundness gathered attention [from investors] following the brighter outlook on the euro zone fiscal crisis and improved sovereign ratings,” said Yoon In-gu, an economist at the KCIF.

In September, three major global credit appraisers - Moody’s, Fitch and Standard & Poor’s - raised their credit ratings on Korea to levels not seen since before the 1997-1998 financial crisis, citing the country’s fiscal soundness and lowered geopolitical risk.

Yonhap