[Banking Support]② Excessive Concerns Are Harmful... Overseas Forecasts Show 'No Korean Credit Crisis'

JP Morgan Rates 76% of Korean Bonds as 'A Grade' or Higher
"60% of Korean Bonds Comparable to Government Bonds"

Commercial Banks Prepare Foreign Currency Liquidity for Interest Rate Hikes

"(Through foreign investment banks, etc.) The stories coming from abroad say that Korea is relatively stable. Except for the United States, China, Japan, and the European Union (EU) are all in bad shape worldwide, but Korea is relatively very stable. However, because there is constant talk of 'crisis, crisis,' we even hear from overseas, 'Is there anything (risk factor) in Korea?'"
(November 1, after a meeting with the heads of the five major financial holding companies, Kim Ju-hyun, Chairman of the Financial Services Commission)

The financial authorities and the banking sector judge that excessive concerns about bond market instability are rather harmful. This is because it can cause misunderstandings among foreign investors and signals that the Korean market is still trusted overseas.

JP Morgan's report titled "Three Factors Shaking Korea's Credit-Liquidity," released at the end of October, also reflects this sentiment. Although incidents like the Legoland case and the non-exercise of the call option by Heungkuk Life Insurance are "challenging crises," they are not expected to lead to a fundamental credit crisis.

The report analyzed, "60% of Korean bonds are almost equivalent to government bonds in quality, and the rest are very high-quality corporate or financial bonds," adding, "76% of Korean bonds hold credit ratings of A or higher." It also stated, "This year, Korea is supplying $26 billion (approximately 38 trillion KRW) in new funds," and "Instead of showing weakness in the domestic bond market, Korean issuers are expected to target offshore bond markets."

The Background Behind Shinhan Bank's Successful Kangaroo Bond Issuance

A representative example is Shinhan Bank's issuance of Kangaroo bonds worth 400 million Australian dollars (about 360 billion KRW) on the 16th. During investor presentations held in Melbourne and Sydney, Australia, although investors asked many questions following the Legoland incident and then the Heungkuk Life Insurance case, Shinhan Bank was able to issue bonds for a larger amount than originally targeted based on the credit of the Korean market.

An official from Shinhan Bank's Treasury Department explained, "Due to the expected increase in U.S. interest rates this year and the resulting dollar volatility, we planned to issue Samurai bonds and Kangaroo bonds as part of our annual bond procurement plan. Since May, as the exchange rate rose, demand for realizing foreign exchange gains surged, and as foreign currency deposits began to outflow from banks, we proactively issued bonds with the idea of managing foreign currency liquidity over the long term."

A senior official from the Financial Services Commission also emphasized the importance of foreign currency bonds, saying, "One way to prevent liquidity tightening now is to bring in external funds."

Korea's Credit Default Swap Also Shows Signs of Stabilization

The premium on Credit Default Swaps (CDS), known as the "canary in the coal mine," also appears to have calmed down. Just as canaries carried by miners warn of toxic gas by chirping, when financial market risks increase, CDS premiums rise, signaling danger.

The CDS premium for Korea's 5-year government bonds surged from about 69 basis points (1bp = 0.01 percentage points) on November 1, after Heungkuk Life Insurance announced the non-exercise of its call option, to 75bp on November 3. However, after the company reversed its position and decided to exercise the call option on November 7, the premium dropped to 61bp the next day, November 8. As of the 16th, it has fallen further to 52bp, showing a stable trend.

However, some voices say it is still too early to be reassured. An official from a commercial bank's Treasury Department said, "In the fourth quarter, foreign investors have entered book closing (accounting year-end settlement), and with overlapping news of instability in the Korean market, Korean bond yields are rising and demand is decreasing in overseas markets. Although we prepared by issuing foreign bonds in advance during the first to third quarters of this year, we need to focus more on managing foreign currency liquidity going forward."