Deutsche Says Korea's Currency Swap Rates to Increase

By Kim Kyoungwha

Sept. 9 (Bloomberg) -- South Korean won currency swap rates will rise, ending a four-week decline, on speculation foreign investors will roll over 7 trillion won ($6.7 billion) in local government debt due this week, according to Deutsche Bank AG.

One-year swap rates may rise about 30 basis points to 4 percent this week, the highest since Aug. 18, as investors buy Korean bonds and use currency swaps to hedge, paying the won fixed swap rate to receive payments based on the dollar London interbank offered rate, said Choi Kyung Jin, a fund manager with Deutsche Bank, Germany's largest bank. Swap rates increase when demand to pay fixed rates outweighs orders to receive.

Overseas demand for $1 billion in Korean global bonds for sale this week will allay concerns that the country is heading for a repeat of the 1997 financial crisis, Choi said.

``With maturities zeroing in on this week, demand for currency swaps is rising,'' Seoul-based Choi said. ``The risk appetite is reviving after funding woes eased.''

The one-year currency swap rate rose to 3.66 percent as of 1:53 p.m. in Seoul, compared with 3.5 percent last week, according to a data compiled by Bloomberg News. It ended a four- week decline on Sept. 5. A basis point is 0.01 percentage point.

A slump in the won to the weakest since 2004 last week sparked speculation South Korea might be headed for a crisis similar to the 1997 financial meltdown that almost halved the value of the currency and led the nation to the brink of default.

A currency swap is a foreign exchange agreement in which investors pay or receive a variable interest rate in a foreign currency in exchange for a fixed Korean won swap rate to hedge or bet on interest rate movements in two different countries.

Crisis Averted?

Deputy Finance Minister Shin Je Yoon said on Sept. 2 the government has enough money to repay debt due this month. External borrowings that mature in a year almost tripled to $175.65 billion as of June 30, official figures show.

Korea's $1 billion global debt sale will pave the way for companies and banks to raise a combined $10 billion later in the year, easing concern about a shortage of dollars, according to Deutsche Bank's Choi.

``Speculation of a crisis was overdone,'' Choi said. ``There's more room to tighten the swap basis as the government's debt sale improves an overall funding situation.''

Credit-default swaps tied to the debt of the South Korean government fell 11 basis points to 124 yesterday, Bloomberg data show. A basis point is worth $1,000 on a swap that protects $10 million of debt from default.

Credit-default swaps pay the buyer face value in exchange for the underlying securities, or cash equivalent, if a company used as the reference in a contract fails to adhere to its debt agreements.

Fannie, Freddie

The U.S. government's takeover of Fannie Mae and Freddie Mac is also helping to reduce concern that a global credit- market slump will make it harder for Korean banks to secure funding, said Jason Rogers, a credit analyst with Barclays Bank.

``As the market is taking the bailout as positive, tighter credit spreads would be positive from a funding perspective,'' Singapore-based Rogers said.

South Korea will hold investor presentations on the foreign-currency debt offer in Singapore, Hong Kong, London, Boston and New York from Sept. 8 to Sept. 11, Deputy Finance Minister Shin Je Yoon told reporters in Gwacheon on Sept. 4.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;