Rating cuts of U.S., Italian lenders hit S. Korean financial markets

South Korean financial markets took a blow Thursday from recent rating cuts of U.S. and Italian lenders as fears over a potential credit crunch spurred hefty stock selling and pummeled the local currency. The benchmark Korean Composite Stock Price Index (KOSPI) finished 2.9 percent lower at 1,800.55 and the Korean won nosedived 29.9 won to close at 1,179.8 won as investors shunned risky assets amid renewed uncertainties. South Korea's credit default swap (CDS) premium, which reflects the cost of hedging credit risks on sovereign debt, also surged to a 26-month high. The CDS premium on South Korea's five-year foreign currency bonds reached 173 basis points, up 14 basis points from the previous session, according to industry data. A higher reading indicates a deterioration in the credit of South Korean government bonds. The figures came after credit rating agencies slashed their outlooks on major U.S. and Italian banks. Moody's Investors Service cut its outlooks on Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. In a separate move, Standard & Poor's downgraded the ratings of seven Italian lenders, citing their high exposure to low-quality sovereign debt. The agency had cut Italy's sovereign debt ratings on Monday. Shares lost ground across the board with blue chip exporters bearing the brunt on fears a global economic slowdown will dent demand. Market bellwether Samsung Electronics lost 2.83 percent and top shipyard Hyundai Heavy Industries tumbled 6.16 percent. Financial heavyweights also underwent sharp losses on concerns the rating cuts will further dampen investor confidence in financial institutions. KB Financial Group, the parent of top lender Kookmin Bank, lost 5.57 percent and state-run Woori Finance Holdings Co. lost 4.7 percent. Market watchers raised worries on the contagion of the eurozone debt situation. "If the fiscal crisis continues, there is a chance of more credit downgrades on sovereign ratings or bank ratings," said Ju Lee-hwan, an analyst at Eugene Investment & Securities Co. Others supported this view, citing the significance of a banking sector downgrade. "Credit ratings of lenders are a critical part of assessing sovereign debt ratings. The recent downgrades on European and U.S. banks reflect the tough situation in the region and may possibly impact the corporate sector as well," said Woo Hee-sung, a researcher at the Korea Center for International Finance. The government, however, said it expects no direct impact from the latest credit downgrades. "It's true that the Korean won fell sharply, largely due to uneasy investor sentiment. But overall the event is likely to have limited influence on the local financial sector as banks have ample liquidity," said an official at the Financial Supervisory Service, the country's financial watchdog. The government has stepped up efforts to stabilize foreign liquidity by conducting stress tests on local banks and setting up contingency plans, the official said, adding situations have changed from the 2008 global financial crisis. Meanwhile, the country's top financial regulator said earlier in the day that a rapid foreign capital outflow stemming from the recent global woes is the largest concern for the South Korean economy. The ongoing situation may last for a relatively long period as the recent economic uncertainties involve the real economy, Financial Services Commission Chairman Kim Seok-dong said in a radio interview.