Aggravating Borrowing Conditions from Foreign Institutions

After the incident with North Korean fighters which threatened a U.S. reconnaissance plane, the international financial sector has collectively issued warning signs as to growing danger on the Korean Peninsula.

Swap interests, which indicate the country default risk (CDR) has soared as much as 70% since last November and additional interest on bonds issued by the Korean government and financial institutions have also risen.

The won-dollar exchange rate reached its highest this year Thursday. Showing initial signs of financial instability, The Bank of Korea (BOK) announced today that swap interests skyrocketed from 70bp (1bp is 0.01%) last November when the North Korean nuclear problem had not yet been raised to 98bp at the end of February, and to 117bp Wednesday in Hong Kong, registering as high as 120bp at one point in the day.

Accordingly, additional interest for BOK overseas bonds jumped to 139bp Thursday from 134bp the day previous. Interest rates rose steeply from 108bp at the end of last November to 123bp at the end of December, to 129bp at the end of February as nuclear threats from North Korea have become a concern.

The won-dollar exchange rate was 1210.50 won Thursday, up from 1130 won the day previous, hitting a record high since the Dec. 12, 2002. “The value of the won is dropping because foreign investors are selling won and buying dollars in the foreign markets,” said a Bank of Korea official.

Bond rates issued by Korean corporations and financial institutions have also been rising sharply in the international financial market.

Korea Electric Power Corporation bonds due in 2007 rose from 138bp at the end of February to 150 on March 5. Kookmin bank bond rates due in 2007 also rose to 150pb from 140bp during the same period.

Loan borrowing conditions from foreign institutions are tightening rapidly, as well.

Kookmin Bank, which was planning to borrow 300 million dollars, reduced the amount to half due to high additional interest demanded by foreign investors.

Financial Supervisory Service International Finance Manager Park Hae-sik said, “There has emerged a vicious cycle in which geopolitical instability arising from the North Korean nuclear crisis is translated into soaring exchange rates, inflation, stock selling sprees by foreign investors, so thus deterring economic recovery.”

Kwu-Jin Lim Chi-Young Shin mhjh22@donga.com higgledy@donga.com