Cheonan Sinking Marginally Affecting Economy: Gov`t

The Korean government has quickly sent letters to the world’s top three credit rating agencies saying the sinking of the naval ship Cheonan has had limited impact on the Korean economy.

The preemptive move was apparently taken based on the judgment that the incident could have a negative impact at a time when Moody’s, Standard & Poor’s and Fitch are finishing up efforts to adjust Korea’s sovereign credit rating.

A ranking official at the Strategy and Finance Ministry said yesterday, “We analyzed the potential impact on the financial market March 27, a day after the Cheonan’s sinking, and sent official letters to the three credit ratings agencies to convey the Korean government’s stance March 31.”

In the past, global credit rating agencies presented a negative outlook for Korea whenever fears over military instability emerged on the Korean Peninsula. Because of this, Seoul seems to have acted to prevent a recurrence of this long-standing practice.

A ministry official said, “We took the measure to help the agencies better understand the situation, and demonstrate the Korean government’s commitment to handle the incident. This is because geopolitical risk on the Korean Peninsula is a major concern for those agencies.”

The government action was made hurriedly since the sinking occurred soon after Korean officials were interviewed by the rating agencies in the final phase of assessing the country’s sovereign credit rating.

Vice Strategy and Finance Minister Huh Kyung-wook held talks with Fitch and S&P representatives in New York March 18-21. Moody’s staff visited Korea and interviewed government officials March 24-26, just before the incident, to adjust the country’s sovereign credit rating.

In the letter, the ministry said the Cheonan sinking has had little impact on the Korean economy, citing the yet unknown cause of the incident and the continued stability of the “credit default swap” premium, a barometer of risk in the event of a national crisis. It also pledged to give an additional explanation after the cause of the sinking is known.

The premium and spread on the foreign currency stabilization bond have remained stable in the international financial market despite the Cheonan fiasco.

turtle@donga.com