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News Analysis: S.Korea's swap market reflects deep concerns over Europe's fiscal crisis

09-15-2011 08:28 BJT

SEOUL, Sept. 14 (Xinhua) -- South Korea's cross-currency swap market plunged on Wednesday as investors took hefty receiving positions in the market due to deepening concerns over the possible Greek default and the potential credit crunch of the European banks.

The cross-currency dollar/won swap rates tumbled by some 35 basis points (bps) in all tenors, with the 1-year and 2- year rates diving to 1.38 percent and 1.20 percent respectively. The 35-basis-point was the largest daily drop since February 2009. The nation's interest rate swap (IRS) rates fell sharply following the sharp falls in the cross-currency swap rates, with the 1-year and 2-year IRS rates sliding to 3.365 percent 3.305 percent each.

The swap basis, or the difference between the cross-currency swap rate and the IRS rate, widened sharply, with the 1-year and 2-year basis jumping to 198.5 bps and 210.5 bps respectively. "The cross- currency swap rates dropped relatively sharply as the market reflected negative issues from Europe at one time after the four- day holiday, but it is true that worries about the European fiscal crisis deepened as the possible Greek default may trigger credit crunch among European banks," a swap dealer at the local branch of a European bank, who declined to be identified,told Xinhua. The nation's financial market was closed for Chuseok holiday on Monday and Tuesday.


Some market watchers warned the Greek default would cause another Lehman-style global financial crisis, which occurred after Lehman Brothers collapsed in 2008. The default will inevitably have a direct impact on European banks with exposures to Greece, leading to another credit crunch of the region's banks.

"Actually, Greece should be regarded as being in default currently. The realization of the Greek default would cause more severe crisis than the 2008 global financial turmoil," Lee Kyung-soo, an analyst at Shinyoung Securities in Seoul, said by phone. Lee noted banks with exposure to Greece should realize their losses on their balance sheets if Greece would fall into default, boosting concerns that the domino effect could happen in the neighboring countries such as Italy and Spain.

Worries about European banks became much deeper after Moody's downgraded the credit ratings of France's second- and third-largest banks. Moody' s cut the rating of Societe Generale to Aa3 from Aa2 with a negative outlook, while lowering the rating of Credit Agricole to Aa2 from Aa1 because of their exposure to Greece.

Reflecting deeper concerns over the European crisis, the nation's default risk jumped during the Chuseok holiday, while the local currency depreciated sharply against the U.S. dollar. The 5-year credit default swap (CDS) rate, which reflects the country's default risks, jumped 11 bps to 154 bps in New York on Monday before edging down to 152 bps on Tuesday. The local currency closed at 1, 107.8 won versus the greenback on Wednesday, down 30.5 won from Friday's close.

"Amid spreading concerns over the possible Greek default, the South Korean won plunged against the dollar even after the authorities were estimated to intervene in the foreign exchange market in a bid to ease the excessive depreciation of the local currency," Jeon Seung-ji, a currency analyst at Samsung Futures in Seoul, told Xinhua. Jeon said the local currency would depreciate further versus the dollar for the time being, forecasting that the won may test the 1,150 won level,or the 120 week moving average rate.


Even though the realized Greek default may trigger another Lehman-style crisis across the globe, the South Korean financial market would be less influenced by the crisis than by the global financial crisis in 2008, market watchers said. "The Greek default seems a matter of 'when' rather than 'if.'

Given lack of room for additional monetary easing in advanced nations, reluctance of fiscal stimulus measures for fiscal crisis and conflicting interests among major European nations, the European economy will unlikely get back into recovery track in the foreseeable future," said Jun Min-gyu, an economist at Hankook Investment & Securities in Seoul.

Jun, however, noted that the realization of the Greek default could have less impact on the South Korean financial market due to increased foreign reserves and reduced short-term foreign debts. Short-term external debts held by local banks declined currently to 38 percent of the total foreign borrowing from the 67 percent tallied in September 2008.

The nation's foreign reserves amounted to a new high 312.19 billion dollars as of the end of August, up 1.16 billion dollars from a month earlier. "Even if Greece defaults, South Korea is unlikely to experience another 2008-type financial crisis given the low likelihood of a drastic outflow of foreign capital and expansionary monetary policies in advanced economies," said Go You- sun, an economist at Daewoo Securities in Seoul. Go said domestic banks' short-term foreign debts has decreased from 66.7 billion dollars in 2008 to around 52 billion dollars currently thanks to the government's control over short-term flows of overseas capital, adding the ratio of short-term debt to the total foreign debt has fallen at a gradual pace.



Editor:Zhang Rui |Source: Xinhua

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