Concerns Over Credit Risk Highlighted by the Ukraine Crisis

'City Macro Risk Index' High Zone
Emerging Market Sovereign Bond Index (EMBI) Surge
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Base Rate Policy Impact Persists Even After Ukraine Crisis Ends

[Asia Economy Reporter Hwang Yoon-joo] An analysis has emerged suggesting that the stock market has begun to reflect concerns about credit risk due to Russia's invasion of Ukraine. It is explained that the rise in major commodity prices and the possibility of tightening capital flows caused by sanctions on Russia have started to appear as indicators of a potential liquidity crisis.

According to IBK Investment & Securities on the 6th, the Citi Macro Risk Index has surpassed 0.8 points, close to the high range. The Citi Macro Risk Index tracks the movements of risk-sensitive assets such as emerging market sovereign bonds or U.S. corporate bonds.

Additionally, the Emerging Market Bond Index (EMBI), which shows investment anxiety in emerging markets compared to developed countries, also surged sharply after the Ukraine crisis. All of these are indicators that reflect changes in credit risk when shocks occur in the global financial market or when there are changes in the investment environment such as shifts in monetary policy.

Jung Yong-taek, a researcher at IBK Investment & Securities, stated, "These indicators show a clear rebound triggered by the current geopolitical risk," adding, "The Citi Macro Risk Index, which aggregates the volatility of price indicators, has already risen to levels seen in previous crisis phases, indicating that investors are facing a market with inherently high volatility risk."

Researcher Jung said, "Traditional risk indicators like the EMBI spread or credit spread have not yet risen enough to be considered a crisis phase, but they have clearly increased compared to January and have a very high possibility of further rises."

He explained, "The significant rise in credit risk indicators partly reflects a response to the war event, but primarily it reflects concerns about increased cost burdens due to the sharp rise in major commodity prices such as crude oil and the resulting deterioration in profitability."

Researcher Jung judged that credit risk concerns have increased recently due to the added burden of sanctions against Russia. This is because major countries decided to expel Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and imposed measures preventing the use of Russia's $630 billion central bank foreign exchange reserves.

Jung analyzed, "These measures are currently focused entirely on the war situation and are still in the early stages, so their effects are not immediately visible, but they are likely to act as factors of instability in the global capital market through various channels in the future. In some cases, they could cause liquidity crises in the short-term funding market."

Jung stated, "Countless global financial institutions are connected with the Russian central bank and financial institutions, and these financial institutions are connected with numerous individual companies. If a default event occurs at any point in this vast network, there is a high risk of a chain reaction of capital tightening along the payment network, and it is almost impossible to control this in advance."

Trend of Fed's Net Treasury Purchases and US Corporate Bond Spread (BAA-10 Year)

Furthermore, Researcher Jung forecasted that even if the current geopolitical risk subsides, credit risk is unlikely to diminish. This is because U.S. monetary policy has shifted to a tightening stance.

Jung said, "Looking at past data trends, irregular factors like geopolitical risk do not form a consistent relationship with credit risk, but monetary policy, especially that of the U.S., which has a significant influence on the global financial market, shows a very clear correlation."

He added, "Since the 2008 global financial crisis, monetary policy tools have shifted from interest rate-focused policies to quantitative policies, and changes in quantitative policies are also closely related to fluctuations in credit indicators. Even if geopolitical risk disappears, past data shows that if the U.S. Federal Reserve's quantitative tightening begins in earnest in the second half of this year, credit risk could expand significantly again."

This content was produced with the assistance of AI translation services.