S. Korea monitoring market response to S&P's U.S. credit rating cut

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SEOUL, Aug. 6 (Yonhap) -- South Korea is closely monitoring financial market developments following the move by Standard and Poor's Rating Services (S&P) to downgrade the sovereign credit rating of the United States, the government said Saturday.
The Ministry of Strategy and Finance said that it will concentrate on controlling market uncertainties that may spread following the news that the U.S. credit rating has been downgraded one-notch from "AAA" to "AA plus" by the international appraiser.
The New York-based S&P announced Friday that it will reduce the ranking in the absence of a credible plan by the U.S. Congress and the Obama administration to lower the deficit, even though the nation's US$14.3 trillion debt limit was lifted. The move marks the first time that the United States sovereign rating has fallen from the "AAA" level since 1941.
"The news is bad and Seoul plans to keep very close tabs on how the market reacts," said Yoon Jong-won, head of the ministry's economic policy bureau.
Yoon said efforts are underway to check the fallout of S&P's decision, although he pointed out that there is a need to weigh the latest bad news with positive developments.
The director general pointed out that there were 120,000 new jobs created in the United States in July, which was higher than the earlier forecast of 80,000-90,000. A better job market usually translates into a healthier economy.
"Judging by conflicting economic signals it is too early to say how things will turn out," he stressed.
Experts have been warning that a downgrade in sovereign ratings could raise the cost of auto loans, home mortgages and other forms of lending in the United States, which can affect the overall economic growth of the world's largest economy. A weak U.S. economy can hurt South Korean growth since it relies heavily on trade and foreign investments.
Others in the ministry in charge of overseeing the country's economic policies downplayed the impact.
"Overall, the market will be affected; we don't anticipate any major fallouts to occur," a source in the international financial office said. He, however, conceded that close monitoring of future developments will be needed since the S&P's announcement comes after the U.S. was hit by bad news only a short time earlier.
Special emphasis will be placed on foreign exchange rates, inflow and outflow of foreign funds, and possible repercussions to the stock and bonds market, government sources said.
Related to the latest development, Vice Finance Minister Yim Jong-yong will host a meeting of senior policymakers from the Bank of Korea, Financial Services Commission and Financial Supervisory Service on Sunday to discuss what actions need to be taken by Seoul.
Private-sector analysts and economists, meanwhile, said close attention should be paid to the local stock and bonds market next week.
Jeong Young-sik, chief research fellow at Samsung Economic Research Institute, said that many financial experts did not think S&P would actually downgrade the U.S. credit rating.
"Since they have (downgraded the U.S. credit rating), this could cause money to exit the local bourse as well as stock markets in other developing countries," he claimed, adding short-term complications in the global monetary market may occur.
This view was echoed by Park Sung-wook, a senior researcher at the Korea Institute of Finance (KIF) who pointed out that a downgrading of the U.S. credit rating is unprecedented.
"South Korea's financial market such as stocks and bonds will feel the aftershock," he warned.
Park predicted that investors may rush to leave less safe markets, which could cause foreigners to shed local stocks and buy less South Korean bonds. Such a development will influence foreign exchange rates and make the U.S. dollar stronger compared to the won.
On the other hand, Park So-yeon, an analyst at Korea Investment & Securities Co., said Seoul's bourse had already fallen sufficiently this week and that the downgrade may have removed market uncertainties.
The KOSPI, the country's key stock index, plunged 8.88 percent, or 189.46 points, this week to close at 1,943.75 on Friday.
yonngong@yna.co.kr