Not at a Critical Level Yet
South Korea’s credit default swap (CDS) premium is rising again amid the ongoing trade disputes between the United States and China and between South Korea and Japan. Although it is not at a critical level yet, South Korea’s sovereign default risk may rise in the second half if the disputes continue.
The Korea Center for International Finance announced on Aug. 13 that South Korea’s CDS premium reached 34 basis points on Aug. 12. It is a low level, close to those of the United States, Japan, Britain and France. For reference, South Korea’s CDS premium was approximately 60 basis points (bp) during North Korea's missile launches and nuclear tests in 2017.
The thing is, it is on the rise. The premium showed a downtrend from mid-30 bp this year before beginning to rise this month. The premium was 28 bp at the end of last month. In other words, it rose 21.4 percent in just eight days.
This is because the impacts of the trade disputes are forecast to take concrete forms in the second half of this year. The premium rose 3 bp, 10 percent, on Aug. 5 alone after the United States decided to impose new 10 percent duties starting from Sep. 1 on Chinese goods worth US$300 billion. The double-digit overnight rise was for the first time in about a year.
The premium slightly fell later. However, it rebounded after the news that U.S. President Donald Trump may cancel his trade negotiations with China scheduled for Sep. 1. What is particularly worrisome is the possibility that the current situations may lead to financial risks.