Korea’s external debt falls in Q3 amid eurozone woes

South Korea’s external debt dropped in the third quarter from three months earlier mainly because local branches of foreign banks repaid overseas borrowing amid the eurozone debt crisis, the central bank said Tuesday.

The country’s external debt totaled $394.3 billion as of the end of September, down $4.9 billion from a record high three months earlier, according to a report by the Bank of Korea.

It marked the first quarterly decline since the foreign debt fell by $8.5 billion in the fourth quarter of last year.

South Korea’s short-term external debt declined by $15.4 billion on-quarter to $138.5 billion mainly because local branches of foreign banks repaid overseas borrowing.

The third-quarter decline marked the largest quarterly fall since a $39.7 billion decline in the fourth quarter of 2008 when the country was in the midst of the global financial crisis.

“The country’s external debt fell as banks in foreign countries withdrew their investments amid the eurozone sovereign debt crisis,” Cho Yong-seung, head of the BOK’s international investment position team, told press in a briefing.

He said tougher rules on currency derivatives also led local branches of foreign banks to repay overseas borrowing.

Overseas borrowing by local branches of foreign banks reached $64.6 billion as of the end of September, down from $76.3 billion three months earlier.

The data came as global financial markets are undergoing high volatility amid fears that the eurozone debt crisis may hit major economies in the region, such as Italy and France.

Analysts said that deleveraging by European banks is likely to continue for some time as the eurozone debt problems are unlikely to be solved in the near future.

South Korea’s holdings of high short-term external debt have been a major headache whenever financial turmoil crops up as a surge in foreign debt leaves local banks vulnerable to external shocks.

In contrast to the reduction in short-term external debt, South Korea’s long-term foreign debt increased as domestic banks tried to secure foreign currency liquidity for rainy days, the BOK said.

The country held $255.8 billion in long-term foreign debt as of the end of September, up $10.5 billion from the preceding quarter.

South Korea’s net external credit reached $97.7 billion as of the end of September, up $10.6 billion from three months earlier, it noted.

Meanwhile, foreign investment in South Korea fell in the third quarter mainly as investors unloaded local stocks. The local currency’s depreciation to the dollar also undercut the value of their shareholdings. The won fell 8.6 percent to the greenback last quarter, compared with three months earlier.

Outstanding foreign investment, including securities investment, stood at $822.5 billion as of the end of September, down $79.9 billion from the previous quarter, the BOK said.

“At the height of the 2008 global financial crisis, foreign investors pulled their investment from local stock and bond markets. But foreign investors continued to buy up Seoul bonds last quarter although foreign stock investment declined,” Cho added. 

(Yonhap News)