Will $7 billion debt plunge Korean won into crisis?
Written on September 1, 2008
A seemingly insignificant event — the maturing of $7 billion worth of foreign holdings of South Korean bonds this month — is threatening to plunge the north Asian country into a full-blown currency crisis.
The amount itself is tiny, under 3 percent of South Korea’s $247 billion in currency reserves.
But the government debt is maturing at a crucial time. The won is already extremely weak, there is growing speculation that the Korean authorities have dropped their defense of the currency and simmering rumors that the government holds huge amounts of worthless U.S. agency debt.
Suddenly, the issue of a small amount of maturing bonds has transcended into more complex fears about the central bank’s credibility and ability to defend its currency.
As the won <KRW=> plunged 3 percent to 4-year lows on Monday, it appeared the damage had already been done cash til payday loan. The market buzz was capital flight. The stock market fell 4 percent.
“It’s not a great deal, but it is the trigger effect,” said State Street strategist Dwyfor Evans, referring to the maturing bonds.
“If people think money will be taken out of the country, it will inspire them to put on short Korea positions.
“Then there are technical levels, stop-loss levels and, before you know it, there’s a momentum to the whole move driven primarily by speculation over the maturing bonds.”
Filed in: marketing.