SEOUL, Oct. 24 (Korea Bizwire) – South Korea’s credit default swap has risen by over 25 basis points since the beginning of this year, reaching nearly 70 bps, amid growing political tensions surrounding North Korea and the U.S.’s hardline stance.
According to data by financial information firm Markit and Yonhap Infomax, the five-year credit default swap (CDS) premium for South Korea stood at 69.93 basis points, up 25.17 from early January, replacing its previous position with China whose CDS premium has dropped from 118.63 to 54.22 basis points over the same period.
A CDS, which is a foreign exchange stabilization bond with a five-year maturity, is designed for the seller to compensate countries and companies in the event of a loan default, meaning countries and companies with higher CDS premiums are indicative of being more vulnerable to risks of default than others.
Experts believe the rise of CDS for South Korea is a result of political tensions surrounding the Korean peninsula heightened by a series of acts of provocation by North Korea in recent months, including long-range missile launches and nuclear tests.
In addition, many believe U.S. President Donald Trump’s hardline stance on North Korea also added to the growing risk facing the South Korean economy.
The five-year CDS for South Korea reached a 19-month record high of 75.43 basis points on the heels of the 72th United Nations General Assembly last month, during which exchanges of threats occurred between North Korea and the U.S.
While the CDS premium has now slowly dropped, seeing as North Korea hasn’t launched another act of provocation during the Party Foundation Day and the National Chinese Communist Party Congress, the figure still stands around 70 basis points.
According to international credit rating agency Moody’s, the rise of South Korea’s CDS premium due to geopolitical tensions isn’t worth adjusting the country’s bond credit ratings, with the country maintaining a rating of Aa2.
However, according to a press release from last week, the credit rating agency did acknowledge that exchanges of threats between North Korea and the U.S. are having a negative impact on the credit of government bonds.
“As geopolitical risks are an ongoing concern (in the region), worries over the issues of credit rating changes are expected to continue for some time,” noted Shin Hwan-jong, a researcher at NH Investment & Securities.
Hyunsu Yim (firstname.lastname@example.org)