Korean Officials Probe 'Kimchi Bonds' Over Concerns on Short-term External Debts Increase

By Park Sae-jin Posted : April 29, 2011, 13:58 Updated : April 29, 2011, 13:58
South Korean authorities are pressuring foreign bank branches over bond market transactions that regulators worry are adding to the country's short-term external debt, Wall Street Journal reported on Friday.

The Bank of Korea and the Financial Services Commission plan to meet with foreign banks to study issues involving sales of certain types of local bonds, called kimchi bonds, said unnamed sources to the Journal. Because local branches of foreign banks are the main buyers of the bonds, the authorities are focusing them over the charge.

The meeting won't include local Korean issuers, as local companies don't have to report details of such transactions, the Jouranl said.

Kimchi bonds are denomninated in currencies other than the local South Korean won, often in US dollars. Issuing companies typically use them to raise dollars to settle transactions with US partners and for other purpose, the Journal reported.

According to the Journal, Korean law says that companies borrowing foreign currency must use the funds only in foreign currency transactions. During the sale process. the seller takes that currency to the swap market and reached a deal to exchange the dollars back into won. The activity can result in higher short-term external debt for South Korea because local branches of foreign banks borrow money from their home offices to buy kimchi bonds.

"The amount of kimcho bonds more than doubled this yeare to $3.7 billion in the first quarter alone, from a total of $6.15 billion for all of last year," Deputy Finance Minister for internation affiars Choi Jong-ku said to the Journal on Thursday.

Such short-term borrowing can be destabilizing during abrupt market shifts, as overseas creditorss pull money back, resulting in sharp drops in the local currency.

(아주경제 송지영 기자)
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