South Korea yesterday held an emergency meeting of senior finance ministry officials to discuss possible fallout from the Standard & Poor’s (S&P) downgrade of US debt, but warned against overreaction.
South Korean Vice Finance Minister Yim Jong-yong met with top officials from the ministry, which afterward said in a statement: “There is possibility that South Korea’s economy might be affected in the short term.”
“However, there is no need to be concerned excessively about our economy and financial markets,” it added.
Yim also called for talks today with policymakers from the Bank of Korea and financial watchdogs to discuss what actions Seoul should take.
However, the ministry also said that South Korea is financially sound, has ample foreign exchange reserves and its overseas markets for exports have been widely diversified.
“This is not good news,” Yoon Jong-won, head of the ministry’s economic policy bureau, was quoted as saying by Yonhap news agency.
However, he stressed the need to weigh the latest bad news against positives such as better-than-expected data on the creation of new US jobs.
“Judging by conflicting economic signals, it is too early to say how things will turn out,” he said.
Standard & Poor’s cut the US credit rating for the first time in history on Friday, saying the country’s politicians are increasingly unable to come to grips with its massive fiscal deficit and debt load.
S&P downgraded the rating one notch from the top-flight “AAA” to “AA+,” and kept the outlook at negative, saying there was a chance it could be cut again within two years.
Meanwhile, a senior Bank of Korea official said yesterday that he saw no major short-term impact from the US credit rating cut.
“Markets have already had a few scenarios on the US ratings and this was one of them, I think,” Hong Taeg-ki, head of the South Korean central bank’s foreign exchange reserve management group, told reporters.
“An ‘AA’ rating has no difference from ‘AAA’ when it comes to the risk weighting of assets held by investors according to the Basel III guidelines and therefore there will be no big direct impact in the short run. And there is no alternative [to shift to],” Hong said.
South Korea has the world’s seventh-largest foreign reserves and is a major investor in US Treasuries.
A South Korean finance ministry official in charge of foreign exchange markets declined to comment on the rating change.
Hong said South Korea was not obliged to invest all of its more than US$300 billion worth of foreign reserves in “AAA” rated assets, although he declined to provide the minimum required credit rating.
He has previously also declined to say whether the central bank had started to cut back on its purchases of US Treasuries.
Almost 64 percent of South Korea’s foreign reserves were in US-dollar-denominated assets as of the end of last year. There was no specific figure for US treasury bond holdings.
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