Credit Default Swaps
The Korea Center for International Finance announced on Oct. 4 that the CDS premium for Korea’s five-year foreign exchange stabilization bond rose one basis point from a month ago to 76 bps on Oct. 2.
The CDS premium used to move around 50 to 60 bps, but has skyrocketed to over 80 bps during the last eight days. Specifically, it increased from 66 bps to 71 bps between Sept. 21 and the following day, and then to 74 and 75 the next two days. The figure reached 83 bps on Sept. 28, three basis points higher than the 18-month high recorded on Aug. 24.
Such a rapid rise can be attributed to an increase in short-term debts with a maturity of one year or less. According to the Bank of Korea, the amount increased by US$8.4 billion to US$121.2 billion between the end of March and the end of June, and the ratio of short-term debts to total external liabilities rose from 26.9 percent to 28.8 percent, an eight-quarter high, during the same period. The ratio of short-term debts to foreign exchange reserves climbed from 31.1 percent to 32.3 percent, too.
Another factor is the current account surplus that is increasing based on the current economic recession. The central bank recently said that Korea recorded a surplus of US$8.46 billion in August, led by a decrease in imports rather than an increase in exports. This situation could be exacerbated depending on the economy of China, which accounts for 25.1 percent of Korea’s exports.
An interest rate hike by the Fed that is expected to take place within this year is another risk factor. In fact, foreign investors are already leaving Korea. As of the end of June, their investments in Korea totaled US$1.0083 trillion, US$15.3 billion less than three months earlier. Direct investments fell by US$2.4 billion to US$180.5 billion, securities investments decreased by US$10.2 billion to US$600.8 billion, and derivatives investments declined by US$4 billion to US$38.4 billion. They took an investment of US$3.74 billion out of the Korean stock market in Aug. alone.