Bank of Korea may buy Euro­pean res­cue fund bonds: Choo

The Pak Banker - - Front Page -


The Bank of Korea may buy the bonds of Europe’s new fi­nan­cial res­cue fund as the notes have the high­est debt rat­ings and the is­suer is backed by gov­ern­ments, ac­cord­ing to the man­ager of the Asian cen­tral bank’s re­serves.

Se­cu­ri­ties sold by the Euro­pean Sta­bil­ity Mech­a­nism, set up last month to re­place the tem­po­rary Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity, are per­ceived to be safe as re­cent pol­icy mea­sures in­clud­ing an un­lim­ited bond-buy­ing pro­gram have eased the risk that Europe’s fi­nan­cial cri­sis will worsen, Choo He­ung Sik, head of the South Korean cen­tral bank’s re­serve man­age­ment group, said in an in­ter­view.

“ESM bonds are an ap­pro­pri­ate tar­get for cen­tral bank in­vest­ment given their AAA rat­ing, cap­i­tal struc­ture and liq­uid­ity,” said Choo. “We al­ready hold EFSF bonds and can con­sider buy­ing ESM bonds.”

The Bank of Korea is di­ver­si­fy­ing its for­eign-ex­change re­serves, which al­most tripled in the past decade to a record $323.5 bil­lion, away from the dol­lar to im­prove re­turns as the Fed­eral Re­serve keeps its bench­mark in­ter­est rate near zero to counter a global slow­down. Dol­lar as­sets ac­counted for 60.5 per­cent of South Korea’s re­serves at the end of 2011, the small­est pro­por­tion since 2007, ac­cord­ing to the cen­tral bank’s lat­est an­nual re­port.

Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi an­nounced an un­lim­ited debt­pur­chase pro­gram in Septem­ber to re­gain con­trol of in­ter­est rates in the euro area and fight spec­u­la­tion of a breakup of the sin­gle cur­rency. The re­gion’s two bailout funds will run in par­al­lel un­til the EFSF, which has com­mit­ted 192 bil­lion eu­ros ($244 bil­lion) of its 440 bil­lion eu­ros in loans to Ire­land, Por­tu­gal and Greece, is phased out by mid2013.

South Korea is con­sid­er­ing pur­chases of ESM bonds af­ter China and Ja­pan sig­naled sup­port for the 500 bil­lion-euro fund last month and pushed for faster mea­sures to solve the Euro­pean sov­er­eign debt cri­sis. The ESM is rated AAA by Fitch Rat­ings and Aaa by Moody’s In­vestors Ser­vice, in­di­cat­ing the high­est level of safety. The fu­ture re­cap­i­tal­iza­tion of banks through the ESM is an “im­por­tant step” to con­vince in­vestors of sta­ble con­di­tions in Europe, Ger­man Chan­cel­lor An­gela Merkel said yes­ter­day.

The BOK, which has di­ver­si­fied its port­fo­lio to a “com­fort­able” level in terms of as­set types and cur­ren­cies, set up a team of three of­fi­cials in Au­gust to ex­plore long-term in­vest­ment op­por­tu­ni­ties in emerg­ing mar­kets, Choo said. The team cur­rently han­dles bond in­vest­ments in China, while the cen­tral bank has hired other as­set man­agers to buy eq­ui­ties in Asia’s largest econ­omy, ac­cord­ing to Choo.

The Korean cen­tral bank said in Jan­uary that it won ap­proval from the Peo­ple’s Bank of China’s to buy bonds and ob­tained an in­vest­ment quota un­der the Qual­i­fied For­eign In­sti­tu­tional In­vestor, or QFII, pro­gram.

The BOK has used a “con­sid­er­able amount” of its 20 bil­lion yuan ($3.2 bil­lion) limit for pur­chases of Chi­nese gov­ern­ment and cen­tral bank debt, Choo said. In ad­di­tion, a $300 mil­lion al­lo­ca­tion for Chi­nese stocks has been fully uti­lized, he said.

Yuan-de­nom­i­nated sov­er­eign bonds have re­turned 2.5 per­cent so far this year, com­pared with a 6.9 per­cent gain for South Korea’s lo­cal-cur­rency debt, ac­cord­ing to in­dexes com­piled by HSBC Hold­ings Plc. The yuan has ap­pre­ci­ated 2.1 per­cent since June and touched a 19-year high of 6.2262 per dol­lar to­day, ac­cord­ing to a data. The won ad­vanced 5.1 per­cent in that time.

“In­vest­ment in China has started as a long-term strat­egy to di­ver­sify our port­fo­lio,” Choo said.

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