South Korean Bank Dollar Costs Rise on Maturing Debt, UBS Says

By Kim Kyoungwha

Feb. 6 (Bloomberg) -- South Korean banks are paying more to borrow as maturing foreign debt and sliding exports intensify a scarcity of U.S. dollars, UBS AG said.

As much as $160 billion of external debt matures over the next two years, compared with national foreign-exchange reserves that shrank 23 percent in the past year to $200 billion, said Nizam Idris, a Singapore-based strategist with UBS, the world’s second-largest currency trader. Financial Services Commission Vice Chairman Rhee Chang Yong said Feb. 5 that banks still face difficulties obtaining U.S. currency.

“The market is still concerned about the huge short-term debt repayments still to come,” Nizam said. “The cross- currency market tells you how expensive it is to borrow foreign currency.”

The one-year cross-currency swap rate on the won was below zero for a record 16th day, indicating banks are starved of dollars. The one-year currency swap was at minus 0.55 percent as of 9:09 a.m. in Seoul, after touching a record minus 1.05 percent on Feb. 3. It averaged plus 3.3 percent in the five years before July 2007.

In a cross-currency swap, investors pay or receive a variable interest rate in one currency in exchange for a fixed rate in another currency. In Korea, local banks typically pay a fixed rate in won in exchange for a floating rate in dollars.

Swap Extension

Korean exports slid by a record 33 percent last month as the deepening global economic slump weakened overseas demand for the nation’s goods. Asia’s fourth-largest economy is poised this year for its first recession since the 1998 Asian crisis, according to a forecast by the International Monetary Fund.

The Federal Reserve extended its agreement to provide $30 billion in U.S. currency to the Bank of Korea by six months until the end of October, the South Korean central bank said on Feb. 4.

“The extension of the swap deal is a mere extension of the repayment period and does not increase the amount of dollars the Bank of Korea could tap, if they needed them,” Nizam said.

Fitch Ratings lowered its credit ratings outlook for the country in November to negative from stable, citing concern currency reserves will drop during the biggest crisis since the nation needed an IMF bailout in 1997.

“The longer the economic condition worsens, the further the asset quality of banks will deteriorate,” said Linan Liu, a Hong Kong-based analyst with Morgan Stanley. “In the meantime, Korean banks still are having difficulty borrowing, although some good quality banks have raised some dollars.”

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