The cost of insuring against exposure to Korean sovereign debt significantly eased amid dramatic geopolitical developments with North Korean summit talks with South Korean and U.S. leaders on the horizon.
According to the financial industry on Wednesday, the premium on credit default swap (CDS) for South Korea’s benchmark five-year foreign exchange stabilization bonds closed Monday at 41.68 basis points, down 5.6 percent or 2.46 basis points from the previous trading day and the lowest since October 26, 2016.
When the cost of protection against credit risk goes down, Korean government and companies can find it easier and cheaper to sell new bonds.
The premium on South Korea’s sovereign CDS has headed lower since a special envoy team upon meeting North Korean leader Kim Jong-un announced the two Koreas will meet for summit talks in late April on March 6. From a week ago, South Korea’s default risk was reduced by nearly 20 percent and 44.7 percent from last peak of 75.43 basis points on Sept. 27 after U.S. President Donald Trump outright shamed Pyongyang and spoke of military action in an address to the United Nations general assembly following North Korea’s tests of nuclear and missiles.
The market perception of South Korean default risk and any change to the AA investment grade sovereign rating will likely be determined by the outcomes of the back-to-back summits in April and May.
By Shin Heon-cheol and Lee Ha-yeon
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