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S. Korea’s CDS premium hits 53 month-low
2012.11.06 09:59:57 | 2012.11.06 15:36:18
The credit default swap (CDS) premium on South Korea’s five-year sovereign bonds dropped to a record low level of 65bp (1 bp = 0.01 percentage points) in 53 months since May 22 in 2008 when the figure recorded 64bp on according to the International Finance Center (IFC) Monday.

[S. Korea’s CDS premium hits 53 month-low] 기사의 본문 이미지

The CDS premium on Korea’s dollar-denominated sovereign bonds soared to 699bp on October 27 in 2008 in the aftermath of the financial crisis and since then, it has been on a constant decline. This year’s highest spread was 171bp which was recorded on January 9. The figure fell below 100bp after recording 99bp on September 5.

The CDS premium has made an additional 20bp drop in just a month after marking 85bp in early-October, indicating that the nation has lower risks of credit defaults than before.

The CDS is a financial derivatives product that insures against the event of loan default for corporations or sovereign nations. Higher CDS premium points to lower confidence in the nation`s economy and higher costs of overseas bond issuances.

The spreads on Korea’s foreign exchange stabilization fund bonds (FESFB), another indicator of the nation’s credit risks, also witnessed a steep fall.

The spread on FESFB which mature in 2019 declined to 38bp - the lowest level since 2009. When compared to October 2 of 60bp, the FESFB slid a whopping 22bp.

The spread on FESFB that mature in 2017 has maintained the 70bp level after reaching 73bp in October. It stayed at 180bp earlier this year but steadily dropped to reach a stable level.

The spread on FESFB reflects the cost a nation’s banks and companies must bear when issuing foreign currency bonds and the lower FESFB is interpreted as an enhanced confidence in the nation’s economy.

[Written by Jieun Lee/ edited by Soyoung Chung]


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