Despite Financial Crisis-Level Shock... Credit Risk Remains Calm

Closing at 26.96bp on the 4th... Lower Than During Yoon's Impeachment Crisis

The KOSPI index took a direct hit from Middle East geopolitical risks, including concerns over a full-scale war between the U.S. and Iran, starting the day with a sharp drop of over 4%. The index is displayed on the status board in the dealing room of Hana Bank in Jung-gu, Seoul on the 4th. The KOSPI index has been on a two-day streak with the sell-side car activated. March 4, 2026 Photo by Dongju Yoon

Despite the extreme turmoil in international affairs due to the fallout from the United States-Iran war, South Korea's credit risk has remained relatively stable. After the Iran incident, the credit default swap (CDS) premium rose to just 27 basis points (1bp = 0.01 percentage point), which is lower than in past crises and even below last year's peak reached during tariff negotiations. This shows that the global financial market does not view the Iran situation as a factor likely to trigger a credit crisis for the Korean economy.

According to the foreign exchange authorities on March 5, South Korea’s CDS premium (based on five-year foreign exchange stabilization bonds) closed at 26.960bp on March 4 (local time) in the New York market. This was an increase of 1.36bp from the previous session and marked the highest point so far this year. However, it remains significantly lower than last year’s annual peak of 40.071bp (April 15), which was reached when the United States pressured South Korea to pay its entire USD 35 billion investment in the U.S. in cash during tariff negotiations in October. While the CDS premium has been on a slight upward trend since late last month, when Middle East tensions began to escalate, the fluctuation has been minimal. Since the United States launched a preemptive strike on Iran on the 28th of last month, the increase has been just 2.36bp.

The CDS premium is a type of insurance fee paid to guarantee principal repayment in the event of a credit risk by the country (or company) that issued the bond. As the credit risk of the country rises, the CDS premium also increases. In the past, South Korea’s CDS premium has surged in times of global economic instability or crises such as war. For example, during the 2008 global financial crisis, it soared to 699bp (October 27), and at the peak of the COVID-19 pandemic shock in 2020, it jumped to 61.1bp (March 23). Last year, when former President Yoon Suk-yeol declared a 12·3 emergency martial law, leading to an impeachment crisis, the premium peaked at 40.420bp (January 13).

The current stability of the CDS premium reflects the market’s assessment that this incident is not an issue that would trigger a credit crisis for the Korean economy. Even after the Iran incident, foreign investors have largely maintained a net buying trend for Korean government bonds. The won-dollar exchange rate soared past 1,500 won — its highest level since the financial crisis — during after-hours trading on March 3, amid low trading volume and high volatility, but then plummeted due to rumors of behind-the-scenes negotiations between the United States and Iran. On this day, the exchange rate opened at 1,464.0 won, down by 12.2 won, and as of 9:40 a.m. continued to fall further in the Seoul foreign exchange market.

An official from the foreign exchange authority stated, "Other major countries with high external dependence, like South Korea, have also not experienced significant fluctuations in their credit risk. Although international oil prices and exchange rates have surged and there are concerns about the impact on the real economy due to the incident, these are not seen as factors that would affect national credit risk."

Compared to past crises, the higher levels of foreign exchange reserves and net external financial assets are also serving as safety buffers to prevent an economic crisis. As of the end of last month, foreign exchange reserves stood at USD 427.62 billion. Although this is less than the all-time high of USD 463.2 billion at the end of 2021, which was reached as the country defended against a rising exchange rate due to the reversal of the Korea-U.S. interest rate differential after the pandemic, it still comfortably exceeds USD 400 billion.

Similarly, net external financial assets, which help defend against crises, remained robust at USD 904.2 billion as of the end of last year. After being in the negative during the foreign exchange crisis (minus USD 63.5 billion) and the 2008 financial crisis (minus USD 70.3 billion), the figure turned positive for the first time in history in 2014 and has continued to grow steadily. On the previous day, Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol commented on social media platform X (formerly Twitter) regarding the Iran situation, saying, "The cause is an external shock rather than the fundamentals of our economy," and added, "The government's crisis response capabilities, including oil reserves and economic supply chains, remain strong."

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