Italy downgrade to hit Korean market

In a surprise move, Standard & Poor’s has downgraded Italy’s sovereign debt rating, a development that analysts said could affect the Korean stock and foreign exchange markets negatively at least in the short term.

The rating agency cut Italian debt one notch to “A/A-1” from a “A+/A-1+” grade, citing Italy’s weakening economic growth prospects and political uncertainty. The downgrade is feared to add more volatility to Korea’s currency market, which in turn could drag down the Seoul bourse.

A quick and consistent measure by the eurozone member countries could block the shock from spreading further, but the outlook remains murky largely because Italy’s politicians are reluctant to tackle the economic debacle decisively while its slowing economy put more pressure on its austerity plans.

“Italy is struggling with the weakened political leadership, which is as serious as its economic conditions,” said Jung Yong-taek, chief analyst at KTB Investment & Securities.

Although the credit downgrade of Italy has been hinted at in recent weeks, Korea’s financial markets are bracing for more volatile trades in the coming sessions at a time when investors are already jittery over the clouded global economic outlook including the U.S., which is one of Korea’s key export markets.

The Korean won has lost ground against the U.S. dollar at a rapid clip in recent sessions partly due to the upswing in the stock market, and the unusual pace alarmed local authorities about the won’s steep decline. On Thursday, the Finance Ministry made the first verbal market intervention in 17 months to stem the won from sliding further.

A senior finance ministry official made another verbal market intervention on Tuesday morning.

“Given the won’s recent movements, the market seems to be overreacting,” said Choi Jong-ku, deputy finance minister, on Tuesday.

“I think that there will be a correction.”

The local currency closed at 1,148.4 won against the greenback on Tuesday, versus 1,137 won on Monday.

“The rapid decline of the Korean won in the foreign exchange market made investors more anxious and jittery, and the downgrade of Italy’s credit rating, against this backdrop, is another negative factor that will add more volatility to the market,” said Hong Soon-pyo, head of market strategy at Daishin Securities.

Analysts said another concern is that French banks, which are exposed to the risks in Greece, might unload Korean bonds if the current crisis worsens, a scenario that could hammer Korea’s stock and foreign exchange markets.

By Yang Sung-jin (insight@heraldcorp.com)