Exceptional Happening: Why Does S. Korea’s Bankruptcy Risk Index Increase despite Inter-Korean Peaceful Mode? | BusinessKorea

Tuesday, February 20, 2018

South Korea’s default risk index is rising further which is exceptional considering the peaceful mode in the Korean Peninsula has always moved in the same direction as the indexes’.
South Korea’s default risk index is rising further which is exceptional considering the peaceful mode in the Korean Peninsula has always moved in the same direction as the indexes’.
Seoul, Korea
13 February 2018 - 10:15am
Yoon Yung Sil

Although the 2018 PyeongChang Olympics is successfully being held in peace, South Korea’s default risk index is rising further. This is exceptional considering the peaceful mode in the Korean Peninsula. First of all, the U.S. stock market crash created the sentiment avoid investing in “risk assets” including assets of emerging countries as well as South Korea. This is due to concerns over possibly growing geopolitical risks on the Korean Peninsula after the PyeongChang Olympics.

According to the data from the Korea Center for International Finance (KCIF) on Feb. 12, South Korea’s credit default swap or CDS premium for its five-year foreign exchange stabilization bond stood at 59 basis points (bps), up 5 bps from the previous day. The figure rose 9 bps from the one on the 2nd, a week earlier.

A CDS premium, which indicates a nation’s default risk, refers to a premium for default of foreign exchange stabilization bond issued in other countries by a government. When the risk of bankruptcy increases, the CDS premium goes up as well as costs of funding.

South Korea’s CDS premium reached some 70 bps last year because of growing geopolitical tension but it dropped to some 40 bps as South and North Korea made the peace for the Olympics this year. The figure hit a year-low of 42 bps on Jan. 11. However, the CDS premium, which stably remained at the 40 bps level since then, continuously show an upward trend after it increased to 50 bps on the 2nd. South Korea’s CDS premium is closely correlated with the relations between North Korea. Accordingly, a steep rise in the nation’s CDS premium is exceptional in consideration of the recent peaceful mode between South and North Korea.

In this regards, Kim Sang-hoon, an analyst for KB Investment & Securities Co., said, “After the U.S. stock market crash on the 5th (local time), there are growing concerns over risk assets in the international financial market and this raised emerging countries’ CDS premium. The overseas factor forced up South Korea’s CDS premium without a domestic factor.”

In fact, South Korea’s CDS premium was 51 bps on the 6th when the domestic market was adversely affected by the U.S. stock market crash but it increased 8 bps in three days to 59 bps on the 9th. The nation’s CDS premium is expected to show an upward trend for a while because there are still concerns over risk assets in the global financial market after the U.S. stock market crash.

In addition, the U.S. still takes a strong stance against North Korea's nuclear program regardless of peace talks between South and North Korea. This is another cause of rising South Korea’s CDS premium, according to some market watchers. U.S. Vice President Mike Pence, who attended the opening ceremony of the PyeongChang Olympics, said to Josh Rogin, a columnist at the Washington Post who joined him on the private jet, “The Trump administration wants the thawing of the relations with North Korea to end as well as soon as the Olympic flame in Pyeongchang goes out.” 

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