“Foreign Financing Interest”, Closer to one before Financial Crisis

A foreign currency borrowings condition of domestic banks has approached closer to a level prior to a financial crisis.

According to Bank of Korea (BOK) on November 26, the average financing costs of short-term foreign loans with less 1 year maturity of banks is ‘LIBOR+0.25%’ as of the end of October. It is similar to RIBOR+0.10∼0.20% before the financial crisis.

Just after the financial crisis, the financing rate of long-term loans with above 1 year maturity showed ‘RIBOR +0.35%’.

The both of them are decreased to the level of 1/3 and 1/4 of the financing costs of the end of 2000 (short term RIBOR +0.76%, long term RIBOR +1.38%) respectively.

Because the credit rating of commercial banks has been raised, the foreign financing costs have decreased.

In the credit rating of S&P, Korea Development Bank (KDB) and the Export-Import Bank of Korea receive A-(grade 7 out of 22 grades), Shinhan Bank and Woori Bank receive BBB+(grade 8). The proper qualification of investment is above than BBB-(grade 10).

As KDB has borrowed USD 0.4 billion from 14 banks in Europe and Asia in September, it has finance at ‘RIBOR+0.15%’ for one year and ‘RIBOR+0.23%’ for two years. Woori Bank has borrowed USD 0.2 billion(1 year maturity) at ‘RIBOR+0.19%’ in July.

Hana Bank has financed USD 175 million from 7 foreign banks including Citi Bank at ‘RIBOR+0.22% for one-year maturity and ‘RIBOR+0.30% for two-years maturity.

As conditions of the foreign borrowings have been better, banks have raised the long- term foreign loans at the low interest rate and then paid the short-term foreign loans. It is forecasted that the weight of short-term foreign loans will decrease among total foreign loans.

In the sovereign credit rating of S&P, Korea is in the level of A-, decreased by 3 grades over AA-(grade 4) before the financial crisis. The analysis says that the foreign financing costs will decrease because of possibility on the additional increase. Yu Jong-Yeol, team leader of foreign exchange operation, BOK said, “As the sovereign credit rating and credit rating of banks is trending upward continuously, the foreign financing costs will decrease more and more. Top-ranking banks can borrow money at RIBOR without additional interest rate.”

Kwu-Jin Lim mhjh22@donga.com