Spread on credit default swaps rises above 2 percent

Korea’s sovereign default risks went up last week as the Korean won and the main stock index confronted a selling spree amid growing concerns over the country’s wobbly financial market battered by the deepening fiscal crisis in Europe.

The spread on credit default swaps, or CDS, for South Korea closed at 202 basis points on Friday, a level higher than France’s 197 basis points.

Although it’s arguably premature to conclude that Korea’s financial market is in worse shape than France’s based on CDS premium data only, the country’s financial authorities and investors alike appeared deeply concerned on Friday over the recent events that shook the country’s stock, bond and foreign exchange markets.

The CDS premium, the cost of insuring Korea’s sovereign debt against default, hit 206 basis points on Thursday, a 28-month high, before gaining a bit to close at 202 basis points last week. A basis point is 0.01 percentage points.

France is also struggling with higher CDS premiums after the European nation saw credit rating cuts of its two major lenders, Credit Agricole SA and Societe Generale SA.

The sovereign debt woes in Europe have been affecting Korea’s financial market. In August alone, European funds withdrew a total 4.7 trillion won from Korea’s stock and bond markets. They cashed out an additional 1.7 trillion won from Sept. 1-20 while European policymakers failed to contain the crisis, according to the Financial Supervisory Service data.

The Korean won tumbled 4.7 percent last week, ending at 1,166.0 won against the U.S. dollar. On Friday, the won gained 13.80 won, thanks largely to a major intervention by the country’s financial authorities.

According to the Bank of Korea, the country’s foreign currency reserves stood at $312.19 billion as of late August, a reserve with which to defend the beleaguered Korean won.

Analysts said the Korean authorities would continue to intervene in the currency market to keep the won-dollar exchange rate below the 1,200 won level, though the outlook remains grim as there are no signs of an immediate breakthrough to the European debt crisis.

The KOSPI stock market index plunged 5.73 percent to 1,697.44 on Friday, hitting below the 1,700 level for the first time since July 8, 2010. The benchmark index was also down 21.9 percent, or 475 points, from Aug. 1 this year when the KOSPI stood at 2,172.31.

By Yang Sung-jin (insight@heralmd.com)