Korean policymakers were striving Sunday to contain the impact from the historic cut in the U.S.’s sovereign credit rating and the European debt crisis amid growing concerns over the domestic markets’ vulnerability to external uncertainties.

Senior officials from the Finance Ministry, the Bank of Korea and the Financial Supervisory Service held an emergency meeting one day after Standard and Poor’s downgraded the U.S.’s debt rating from AAA to AA+.

“There is no reason for the market to overreact,” Vice Finance Minister Yim Jong-ryong said during the rare Sunday meeting, citing the economy’s financial soundness and ample foreign exchange reserves.

“The external instability should have limited impact on the domestic economy.” 

Despite S&P’s unprecedented move, policymakers asserted their shared confidence in the U.S.’s fiscal and economic health.

“Relevant financial authorities had a discussion about this and there was a common understanding that we remain confident of the U.S. economy and its ability to pay debts,” he added.

The twin crises in the U.S. and Europe pummelled Korean financial markets last week.

The benchmark KOSPI on Friday tumbled below 2,000, a psychologically significant level in the local market.

The Credit Default Swap premium on a five-year foreign currency bond, representing risk premiums, topped 115 basis points, the highest level since November. An increase in the CDS spread is a bearish signal.

During the meeting the officials agreed on the need for preemptive measures to stabilize the markets.

“We need to consider policies to ensure that timely measures are taken to reduce excessive volatility stemming from external shocks and stabilize investor sentiment,” he said.

Korea has the world’s seventh largest foreign reserves, of which over 60 percent is denominated in the U.S. dollar.

Asia’s fourth largest economy has been aggressive in expanding its reserves in the aftermath of the 2008-09 global financial downturn. As of July, its reserves reached $311.03 billion, the highest level the country has ever accumulated.

Investment banks warned that Asia, including Korea, could be one of the greatest victims of the current debt crisis abroad given the region’s reliance on trade and exposure to global financial markets.

Nomura Securities and Morgan Stanley pointed that Korea’s ability to finance short-term debt is still the lowest level in Asia.

But Seoul officials downplayed the danger, repeating that the country’s economic fundamentals would weather the external shocks.

Kim Yi-tae, deputy director of the ministry’s international finance division, said the market would stay resilient as the economy has “a diversified basket of trading partners, strong financial fundamentals and enough exchange reserves to stave off external shocks.”

Earlier in the day, the Bank of Korea said, “Markets have already had a few scenarios on the U.S. ratings and this was one of them.”

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