The Bank of Korea may buy the bonds of Europe’s new financial rescue fund as the notes have the highest debt ratings and the issuer is backed by governments, according to the manager of the Asian central bank’s reserves.
Securities sold by the European Stability Mechanism, set up last month to replace the temporary European Financial Stability Facility, are perceived to be safe as recent policy measures including an unlimited bond-buying program have eased the risk that Europe’s financial crisis will worsen, Choo Heung Sik, head of the South Korean central bank’s reserve management group, said in an interview in Seoul yesterday.
“ESM bonds are an appropriate target for central bank investment given their AAA rating, capital structure and liquidity,” said Choo. “We already hold EFSF bonds and can consider buying ESM bonds.”
The Bank of Korea is diversifying its foreign-exchange reserves, which almost tripled in the past decade to a record $323.5 billion, away from the dollar to improve returns as the Federal Reserve keeps its benchmark interest rate near zero to counter a global slowdown. Dollar assets accounted for 60.5 percent of South Korea’s reserves at the end of 2011, the smallest proportion since 2007, according to the central bank’s latest annual report.
European Central Bank President Mario Draghi announced an unlimited debt-purchase program in September to regain control of interest rates in the euro area and fight speculation of a breakup of the single currency. The region’s two bailout funds will run in parallel until the EFSF, which has committed 192 billion euros ($244 billion) of its 440 billion euros in loans to Ireland, Portugal and Greece, is phased out by mid-2013.
South Korea is considering purchases of ESM bonds after China and Japan signaled support for the 500 billion-euro fund last month and pushed for faster measures to solve the European sovereign debt crisis. The ESM is rated AAA by Fitch Ratings and Aaa by Moody’s Investors Service, indicating the highest level of safety. The future recapitalization of banks through the ESM is an “important step” to convince investors of stable conditions in Europe, German Chancellor Angela Merkel said yesterday.
The BOK, which has diversified its portfolio to a “comfortable” level in terms of asset types and currencies, set up a team of three officials in August to explore long-term investment opportunities in emerging markets, Choo said. The team currently handles bond investments in China, while the central bank has hired other asset managers to buy equities in Asia’s largest economy, according to Choo.
Investing in China
The Korean central bank said in January that it won approval from the People’s Bank of China’s to buy bonds and obtained an investment quota under the Qualified Foreign Institutional Investor, or QFII, program.
The BOK has used a “considerable amount” of its 20 billion yuan ($3.2 billion) limit for purchases of Chinese government and central bank debt, Choo said. In addition, a $300 million allocation for Chinese stocks has been fully utilized, he said.
Yuan-denominated sovereign bonds have returned 2.5 percent so far this year, compared with a 6.9 percent gain for South Korea’s local-currency debt, according to indexes compiled by HSBC Holdings Plc. The yuan has appreciated 2.1 percent since June and touched a 19-year high of 6.2262 per dollar today, according to data compiled by Bloomberg. The won advanced 5.1 percent in that time.
“Investment in China has started as a long-term strategy to diversify our portfolio,” Choo said. “We may buy more Chinese assets, but can’t say how soon and how much.”