ID :
198297
Sun, 07/31/2011 - 08:24
Auther :
Shortlink :
https://oananews.org//node/198297
The shortlink copeid
U.S. debt crisis likely to affect S. Korean financial market, economy: analysts
SEOUL (Yonhap) - The deepening concerns stemming from the U.S. debt crisis is expected to have a significant impact on South Korea's economy by intensifying uncertainty in the global financial and business market conditions, analysts said Sunday.
Fears are rising that the world's largest economy could default on its debt as U.S. politicians still remain split over how to raise the borrowing limit, with the Aug. 2 deadline just a couple of days away.
The world is paying close attention to whether the U.S. can reach a deal before the deadline. Failure could send shockwaves across the globe, causing the dollar to plunge, freezing investor sentiment and prompting yet another worldwide economic recession.
South Korea might be among the hardest hit as its economy depends heavily on exports, analysts said. A plunge in the U.S. dollar would lead to a spike in Korea's local currency value, which will undercut the nation's overall export price competitiveness, they added.
"What is most concerning is that the U.S.'s failure to raise its debt ceiling will intensify the overall volatility in the foreign currency markets," said an official of the Bank of Korea, South Korea's central bank. "Higher financial market volatility could exacerbate major economic indicators here at a marked pace."
The currency value is a major factor that determines the nation's economic growth.
Though it might help the government's ongoing efforts to bring inflation under control by lowering import prices, it could weigh on the price competitiveness of its exporters in overseas markets, observers said.
According to the government's projection, a 10-percent appreciation of the nation's currency could translate into a US$70 billion reduction in its current account balance and a 0.8 percentage point decline in its gross domestic product.
A U.S. default could also result in freezing the capital flows worldwide to the detriment of South Korea's financial system, which relies heavily on foreign investment in its stock and debt markets, analysts added.
In addition, lingering debt worries in the U.S. could increase interest rates there, possibly intensifying financial market instability here by prompting an exodus of foreign capital, analysts noted.
Against this backdrop, the spread on credit default swaps (CDSs) for U.S. debts has been on the rise.
As of July 18, the CDS spread for U.S. debts stood at 0.56 percentage points, the highest in 17 months. The spread reflects the cost of hedging credit risks on corporate or sovereign debt.
Few expect the U.S. will fail to find a compromise in averting the feared default and that there will be an immediate credit downgrade on U.S. debts even if Washington breaches the deadline.
But experts here say that it would be inevitable to see an increase in CDS premiums or borrowing costs for U.S. debts for the time being as uncertainty will likely hang over its economy due to concerns over its long-term fiscal soundness.
"(An interest rate hike in the U.S.) could prompt capital held by foreign investors to leave the local markets in droves, and this is highly likely to serve as a unfavorable factor for the financial markets here," said Lee Yoon-seok, a researcher at the Korea Institute of Finance.
Fears are rising that the world's largest economy could default on its debt as U.S. politicians still remain split over how to raise the borrowing limit, with the Aug. 2 deadline just a couple of days away.
The world is paying close attention to whether the U.S. can reach a deal before the deadline. Failure could send shockwaves across the globe, causing the dollar to plunge, freezing investor sentiment and prompting yet another worldwide economic recession.
South Korea might be among the hardest hit as its economy depends heavily on exports, analysts said. A plunge in the U.S. dollar would lead to a spike in Korea's local currency value, which will undercut the nation's overall export price competitiveness, they added.
"What is most concerning is that the U.S.'s failure to raise its debt ceiling will intensify the overall volatility in the foreign currency markets," said an official of the Bank of Korea, South Korea's central bank. "Higher financial market volatility could exacerbate major economic indicators here at a marked pace."
The currency value is a major factor that determines the nation's economic growth.
Though it might help the government's ongoing efforts to bring inflation under control by lowering import prices, it could weigh on the price competitiveness of its exporters in overseas markets, observers said.
According to the government's projection, a 10-percent appreciation of the nation's currency could translate into a US$70 billion reduction in its current account balance and a 0.8 percentage point decline in its gross domestic product.
A U.S. default could also result in freezing the capital flows worldwide to the detriment of South Korea's financial system, which relies heavily on foreign investment in its stock and debt markets, analysts added.
In addition, lingering debt worries in the U.S. could increase interest rates there, possibly intensifying financial market instability here by prompting an exodus of foreign capital, analysts noted.
Against this backdrop, the spread on credit default swaps (CDSs) for U.S. debts has been on the rise.
As of July 18, the CDS spread for U.S. debts stood at 0.56 percentage points, the highest in 17 months. The spread reflects the cost of hedging credit risks on corporate or sovereign debt.
Few expect the U.S. will fail to find a compromise in averting the feared default and that there will be an immediate credit downgrade on U.S. debts even if Washington breaches the deadline.
But experts here say that it would be inevitable to see an increase in CDS premiums or borrowing costs for U.S. debts for the time being as uncertainty will likely hang over its economy due to concerns over its long-term fiscal soundness.
"(An interest rate hike in the U.S.) could prompt capital held by foreign investors to leave the local markets in droves, and this is highly likely to serve as a unfavorable factor for the financial markets here," said Lee Yoon-seok, a researcher at the Korea Institute of Finance.
