Credit risk

Korea’s sovereign credit risk level at highest in five years

Korea’s credit default swap (CDS) premium hit its highest level in five years on Oct. 31.



The credit default swap (CDS) premium on the five-year Foreign Exchange Stabilization Bond (EFSB) issued by the South Korean government rose 4 basis points to 70 on October 31, the highest since November 14, 2017. The figure was 21 basis points on January 3 this year and exceeded 50 on September 23 before reaching 60 on October 10. In other words, the credit risks of South Korea’s domestic economy and enterprises continue to rise.

Similarly, the spread on the USD-denominated five-year FESB fell from 49 to 52 on October 31. This means that a spread of 0.52 percentage points must be provided over the coupon rate of the five-year Treasury note. The figure was 39 on January 3.

The increase in the CDS premium is due to the fact that South Korea’s trade balance is deteriorating, that the risks attributable to the heavy dependence on the Chinese economy are not disappearing and that the market conditions short-term funds deteriorate mainly in the corporate bond market.

Still, experts point out that the current CDS premium is not a risk, given that it stood at 691 during the global financial crisis 14 years ago. “The figure has shown a rapid increase recently, and yet it is much lower than the crisis of 2008 and the European budget crisis of 2011,” said one, adding: “The current level is close to from that of the US-China trade disputes in 2017 and 2018”.