Korean Bonds Dumped in Foreign Market

SK Global`s accounting scandal caused a selling spree of Korean bonds in the world financial markets including Hong Kong and New York, driving up interest rates.

The rising geopolitical risks on the Korean Peninsula due to North Korea`s test launch, the SK Global case considered the Korean version of the Enron scandal, have pulled down Korea`s credit rating.

The Bank of Korea (BOK) announced that Korea`s country default risk (CDR) soared to 2.0% on March 12 from 1.57% on March 10 and that interest rates for BOK overseas bonds rose to 1.9% on March 12 from 1.5% on March 11 on the Hong Kong Market.

In New York, interest rates for BOK overseas bonds rose to 1.97% on March 12 from 1.72% on March 11 and interest on other Korean corporate bonds also skyrocketed.

In the domestic financial market, institutional investors dumped bonds, pulling out 1.7 trillion won on March 11 and 5.1 trillion won on March 12 from investment trust firms. 6.8 trillion won was pulled out for two days and this trend continued to March 13.

The BOK supplied liquidity worth 2 trillion won to investment trust firms by buying RP (Bonds with Repurchase Agreement) and decided to purchase all government bonds from investment firms if needed.

The BOK is planning to supply unlimited funds by decreasing the reserve rate to calm the situation.

The selling spree in investment trust firms was mitigated due to the BOK`s stabilizing measures, but stocks and bonds of SK subsidiaries are still unstable. World-renowned credit rating agencies, Standard & Poors and Moody`s, warned today that they could downgrade SK Corp`s rating to a lower level, spreading the crisis to other SK subsidiaries.

SK Corp. held an investor relations meeting with institutional investors today and said, “We don`t have any liquidity problem since we have cash and savings worth 2.6 trillion won including foreign currency worth 700 million dollars. The company also said that it is considering purchasing treasury stocks.

With the Moody`s announcement of Korea`s maintaining its current sovereign credit rating, interest rates for BOK overseas bonds dropped 0.2% on the Hong Kong market, indicating the situation will calm dowm soon.

However, the BOK analyzed that the interests of Korea`s bonds is likely to rise additionally with mounting geopolitical risks and SK Global`s accounting scandal.

Kwu-Jin Lim Do-Young Kim mhjh22@donga.com nirvana1@donga.com