Asian risk premiums rise

Asian risk premiums rose on Friday, with South Korean bond spreads jumping, amid deepening fears about the global economy and the fate of struggling US corporate giants such as Citigroup and General Motors.
The cost of protection against defaults in Asian debt has now risen for a fifth consecutive session to a monthly high, especially in countries such as the Philippines whose currencies are tumbling, but remain well below the records hit in late October.
Thin trading volumes are compounding the volatility, traders said, as the intense risk aversion gripping markets has investors buying protection, but few willing to sell. "It's quiet, but the widening trend is likely to continue, given all the uncertainty out there," said a trader for a major foreign investment bank in Hong Kong.
The Asia ex-Japan iTRAXX investment-grade index, a key measure of risk aversion, widened by about 20 basis points (bps) to 475. The spread has moved out some 120 bps this week alone, although levels are nowhere near the record of just under 650 in late October. The equivalent high-yield index was 40-50 basis points wider at 1,300.
Asian bond spreads have surged this year, beyond levels in Europe and the United States, amid worries that a global recession may spark defaults in less developed economies. The Markit iTraxx Crossover index, made up of mostly "junk"-rated European credits, hit a record wide spread of 932 bps on Thursday, though that compared with the record at around 1,400 bps hit by the Asian iTRAXX high-yield index.
Weak economic indicators, including a report on Thursday showing weekly US jobless claims surged, are pounding confidence world-wide. Other potential worries include a darkening outlook for Citigroup and auto makers such as General Motors. [ID:nCRISIS]
Singapore on Friday said the economy shrank more-than-expected in the third quarter, indicating the severe impact from a sharp slowdown in global demand for Asian exports.
In South Korea, the won currency tumbled to a near 11-year low after the country's president said the government should not intervene to help. Adding to the woes, investment bank UBS said the economy may contract in 2009.
South Korea's five-year credit default swaps (CDS), or insurance-like contracts that protect investors against defaults or restructuring, widened about 30 basis points to 460.
Falling currencies make it more expensive for countries to service their overseas currency-denominated debt. Philippines' five-year CDS rose some 40 basis points to 580 amid concerns about the tumbling peso. The country's central bank on Thursday kept interest rates steady in a bid to support its currency.
Indonesia's five-year CDS remained range-bound at about 950 bps, though the contract was thinly traded, according to one dealer. The country's central bank governor said it remains committed to the free movement of capital, as the rupiah plunged to a new post-Asian financial crisis low on Friday.