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제목 Impact of Improving Inter-Korean Ties on the Financial Market


An improving inter-Korean relationship is having a positive impact on the local financial market and economy. South Korea's credit default risk hit a 19-month low in mid-May amid subsided tensions between the two Koreas and between North Korea and the United States. The premium on the credit default swap (CDS) for South Korea's five-year foreign exchange stabilization bonds dropped to 40.61bp on May 11, the lowest figure since October 2016 when the CDS premium reached 40.25bp. As of May 30, the CDS premium stood at 44 bp, down from 53 at the end of last year.

A CDS is a financial swap agreement that the seller of the CDS compensates the buyer in the event of a debt default or other credit event, and the CDS premium is the cost of hedging credit risks on corporate or sovereign debt. If the premium goes down, it implies that the credit of government bonds has improved.

Although the South Korean economy has remained relatively steady and immune to the North's nuclear threats over the past decades, the growing signs of reconciliation between the South and the North are further boosting the economy and financial market of the South, particularly in the wake of the inter-Korean summit on April 27. Market experts say that a successful summit between North Korea and the United States would also help stabilize South Korea's financial market, having a positive effect on consumer and investor sentiments.

Korea's CDS Premium

(Source: Korea Center for International Finance)

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