The credit default swap (CDS) premiums of South Korean financial companies and government-run financial institutions have soared since Aug. 2, when the Japanese government announced that it would exclude South Korea from its trade whitelist.
For example, the Export-Import Bank of Korea’s CDS premium on five-year bonds rose 17.65 percent from 30.6 bp on Aug. 1 to 36 bp on Aug. 6. During the same period, those of Korea Development Bank and Industrial Bank of Korea rose from 30.5 bp to 36 bp and from 33.8 bp to 39.8 bp, respectively. Likewise, those of KB Kookmin Bank, Hana Bank, Woori Bank and Shinhan Bank rose 14.77 percent, 12.7 percent, 10.11 percent and 8.95 percent, respectively.
Although their absolute CDS premiums are still low, the ongoing economic and trade disputes between South Korea and Japan and between the United States and China are causing the premiums to soar. The disputes have had a significant impact on South Korea’s stock and foreign exchange markets since the beginning of this month. KOSPI dipped below 1,900 points on Aug. 6 and the won-dollar exchange rate has broken a psychological barrier of 1,200 won per U.S. dollar.
With the financial markets exposing their vulnerabilities to the external shocks, an increasing number of market participants are expressing concerns that Japan’s financial retaliation can jolt the markets. They increasingly doubt the South Korean government, which has reiterated without statistical data that the markets’ dependence on Japan is low and there will be no problem even in the event of its financial retaliation.
“The government hid the fact that its foreign exchange reserves ran out until immediately before its IMF bailout request about 20 years ago,” said an industry insider, adding, “The potential retaliation can be dealt with only after the government becomes more transparent.”