Experts note risk factors related to North Korea are short-lived


Monetary policy in the U.S. and the debt woes in the eurozone have caused greater volatility in Korea’s financial market than the death of North Korean leader Kim Jong-il, data showed Thursday.

Research by the Korea Center for International Finance found that investors this year were more concerned about how the economy fared in advanced countries for the trade-dependent market here than the North Korea problem.

The cost of insuring Korea’s bond against the risk of default, known as Credit Default Swap premium, jumped to a 28-month high of 205 basis points on Sept. 22 as the U.S. Fed rolled out new policy action to lower the long-term interest rate. The CDS premium shot up 8 basis points to 167 basis points on Monday following the official announcement of Kim’s death, marking only the 16th-biggest increase this year.

The higher the CDS premium, the more likely the market demands premium on the purchase for the increased sovereign risk. The U.S. Federal Open Market Committee in September shifted $400 billion of the Fed’s portfolio from short-term to long-term assets, in an action described as Operation Twist, to lower long-term the interest rate and boost the economy. The KCIF said doubts about the U.S. policy in easing financial conditions of the world’s most powerful economy caused the biggest volatilities for the market here.

“Historically speaking, abrupt downside risks related to North Korea are usually short-lived. Investors know, from experience, that Kim’s death isn’t likely to bring a lot of changes in the economic climate,” Kim Yoon-kyung, an economist at KCIF, said.

The country’s CDS premium jumped 18 basis points to 135 basis points when credit rating agency Standard & Poor’s made historic downgrade for the U.S. from AAA to AA+. The figure shot up 14 basis points on Sept. 21 following the credit rating cut of Italy by S&P.

All three major credit rating agencies ― Moody’s Investors Service, Fitch Ratings and S&P ― had said that the death of North Korean leader would not lead to a downgrade of South Korea’s debt rating.

By Cynthia J. Kim (cynthiak@heraldcorp.com)