CDS premiums, foreign exchange reserves, BIS capital adequacy ratio, southern Eurozone crisis
The failure of the pro-austerity forces to win a majority in Greece's parliamentary elections on May 6 intensified doubts about the eurozone's survival, roiling global financial markets yet again. Caught up in the downturn, the Korean won depreciated to 1,180 per US dollar in May, from 1,130 at the end of April, while the KOSPI, the main stock index, dropped to 1,843 from 1,982. Nevertheless, the Korean markets were able to absorb the latest shock from the eurozone much better than in other periods of recent financial turmoil.
Major market indicators, including the won, stock prices, three-year government bond yields and credit default swap (CDS) premiums, have become more durable. Compared to May-June of 2010, when the eurozone sovereign debt crisis moved to the forefront, and the summer of 2011, when the crisis deepened in southern eurozone nations and the US suffered a sovereign credit rating downgrade, Korea's market indicators have shown a more measured response.
Degrees of shock to financial markets vary, of course, with every period of financial volatility. This paper examines the resilience of Korean financial markets to external shocks during recent periods of exceptional instability. The analysis compares the currency, equity and bond markets in Korea to those in the OECD and G20 member states.
STABILITY IN FOREX, STOCKS AND BONDS
Analysis shows that Korea's foreign exchange market has become more resilient. It ranked fourth in dealing with volatility between May and June this year, when concerns rose over a possible Greek exit from the eurozone. The high ranking reflected a continuing rise from 23rd in August-September 2008, when the global financial crisis fully erupted; 20th during the Southern eurozone crisis in May-June 2010, and 13th during August-September 2011, when there was a downgrade of the US credit rating and a worsening of the eurozone crisis. Currency value stability (the appreciation rate against the dollar) also steadily climbed from 20th to 15th, and then to 13th and to 7th.
Korea's stock markets have largely tracked the movements of markets in 35 other countries. Instability has increased slightly, putting Korea's markets in the low to moderate range.
The Korean bond market also has become sturdier compared with global peers. Stability in terms of government bond yield volatility has been the fourth best among 29 international markets. This is an improvement from 18th during the 2008 global financial crisis.1 In addition, the movements of the credit default swap (CDS) premium, a measure of sovereign credit risk, has been more stable than in previous financial shocks. It had surged in the past when external shocks hit the country despite Korea not being the origin of the crisis. The CDS premium rose 162.4 basis points during the 2008 turmoil, more than three times the average increase of 68.9 basis points, but increased only 7.4 basis points, far below the 24.2 basis point increase on average, during the eurozone chaos.
STRONG FUNDAMENTALS, NEW FINANCIAL POLICIES
The ability of Korean financial markets to absorb external blows is due to Korea's relatively favorable economic fundamentals and policy initiatives. Foreign exchange reserves and current account balances have all improved and the soundness of financial institutions has been enhanced. Foreign exchange reserves stood at $315. …