Declining Spread of Foreign Exchange Equalization Bonds

As the short-term war in Iraq and peaceful resolution of the NK nuclear issue is gaining promise, the spread of Korean debts is returning to prior levels as seen before the SK Global scandal.

The country’s credit risk swap premium (CDS spread) recovered up to the level of February, which represents guarantee fees on transactions of foreign exchange stabilization bonds.

In the Hong Kong bond market yesterday, the BOK explained that the spread of the above bonds gaining maturity in 2008, over U.S. treasury bond yield dropped to 1.36% from 1.42% or 0.06% as compared to that of last weekend. At one time the spread soared to 2.15%, a yearly high on March 12 as a result of the SK Global scandal and NK`s missile test, with the spread decreasing to the 1.28% level at the end of February.

The spread, showing 1.23% at the end of last year and 1.28% at the end of February, climbed to 1.75% on March 12 with the SK Global case, and 1.65% on March 10 at the time of NK`s missile test.

The CDS spread also fell to 1.15%, based on a Deutsch Bank quotation, by 0.85% as compared to the highest level of 2% on March 12. The CDS spread has shown almost the same pattern as that of the above bonds.

The Bank of Korea foresees that funding of long-term capital by domestic financial institutions will be accepted on the market in the light of the fact that Japanese banks affirmatively show their intention of lending to Korean counterparts following the plunging percentages of those bonds.

Kwu-Jin Lim mhjh22@donga.com