Korea’s default risk at 19-month low following inter-Korean summit

2018.05.10 13:53:02 | 2018.05.10 15:53:43

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Insurance premium against South Korean sovereign debt fell to a 19-month low amid eased tensions in the Korean Peninsula following the landmark inter-Korean summit talks at Panmunjom on April 27.

According to monthly financial market data released by the Bank of Korea (BOK) on Wednesday, the premium credit default swap (CDS) for South Korea’s benchmark five-year foreign exchange stabilization bonds averaged 43 basis points during the first seven days of May, down from the average of 49 basis points in the previous two months. The last time the protection cost in Korean government bonds was this low was in October 2016 when it averaged 41 basis points.

A lower spread in the insurance against default makes it cheaper and easier for the Korean government and companies to issue bonds overseas.

The CDS for Korean sovereign bonds hinges highly on North Korea-related risks. The premium hit as high as 71 basis points in July last year following a series of nuclear weapon and missile tests by North Korea.

Expectations for a breakthrough in the North Korean nuclear conundrum and the possibility of revived inter-Korean economic cooperation sharply reduced the credit risk for Korean debt.

By May 7, the premium on CDS for the country’s five-year FX bonds fell to 42 basis points. For the same reason, the Korean currency strengthened 1.3 percent from 1,063.5 won in March to 1,072.2 won on May 4 against the U.S. dollar.

Meanwhile, foreign investors sold a net $2.04 billion of Korean stocks and bought $640 million of bonds in April.

By Kim In-oh and Cho Jeehyun

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