S. Korea Reaffirms Faith in U.S. Treasuries After S&P Downgrade

Sunday, 07 Aug 2011 07:44 AM

Aug. 7 (Bloomberg) -- South Korea said it reaffirms faith in U.S. Treasuries even after Standard & Poor’s last week cut the sovereign credit rating of the world’s biggest economy.

“Our faith in the U.S. Treasuries has not changed, although we cannot say whether to sell or buy them,” Vice Finance Minister Yim Jong Yong told reporters after an emergency meeting with officials from the central bank and financial regulators in Gwacheon, south of Seoul, today. “In principle, no other assets can replace the U.S. Treasury as safe asset.”

New York-based S&P Aug. 5 lowered the AAA credit rating for the U.S. by one level, to AA+, for failing to cut spending or raise revenue enough to reduce record budget deficits. Moody’s Investors Service and Fitch Ratings Aug. 2 affirmed their top credit rating for the U.S.

South Korea’s Kospi stock index fell 3.7 percent to 1,943.75 in Seoul trading Aug. 5, the biggest decline since Nov. 27, 2009, amid concern the U.S. economic recovery is petering out. The won had its biggest weekly drop against the dollar since February.

The U.S. Treasury Department said there is “no justifiable rationale” for the move, adding the rating company made a $2 trillion mistake in its calculations.

Russia said the one-step cut “can be ignored” and France joined the U.S. in questioning S&P’s reasoning. China’s official Xinhua news service said in a commentary that the U.S. must cure its “addiction” to borrowing.

Limited Impact

Yim said South Korean financial markets may have short- lived and limited impact from the U.S. rating downgrade because the nation has enhanced its capability to counter a crisis and that its well-diversified export market will help support the nation’s economic growth.

“There is no sign of foreign capital flight yet,” Yim said. Foreign investors bought a net 120 billion won ($113 million) worth of South Korean bonds on Aug. 4 and Aug. 5, he said.

The authorities will re-launch its 24-hour market monitoring system with a focus on capital flows and foreign- exchange rate and take prompt action whenever needed, he said.

The Bank of Korea’s board will meet on Aug. 11 to discuss whether to raise borrowing costs for the fourth time this year to tame inflation. Higher energy and food costs pushed South Korea’s inflation to a four-month high of 4.7 percent in July, breaching the central bank’s target every month this year.

S&P currently gives 18 sovereign entities its top ranking. The U.K., with a debt estimated at 80 percent of GDP this year, or 6 percentage points higher than the U.S., has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P has said.

New Zealand is the only country other than the U.S. that has an AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.

--Editors: Cherian Thomas, Michael Shanahan

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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