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Korea's credit risk rising faster than Israel, Saudi Arabia despite distance from Iran war

Published: 31 Mar. 2026, 14:52

Israeli Prime Minister Benjamin Netanyahu speaks during a press conference, amid the U.S.-Israel conflict with Iran, in Jerusalem, Israel, on March 19. [REUTERS/YONHAP]

Missiles are landing in the Middle East, but the loudest alarm bells are ringing in Korea’s financial markets, as Seoul’s credit risk and currency continue to weaken despite a relative distance from the Iran war.

Korea’s credit default swap (CDS) premium has surged more than 30 percent in just a month, while the won has weakened past 1,500 per dollar — even as CDS premiums in countries directly involved in or near the conflict have declined. A CDS premium refers to a financial derivative that functions like an insurance policy against the risk of a borrower defaulting on their debt.

Korea’s five-year CDS premium stood at 33.84 basis points as of Thursday, up 33.43 percent from 25.36 basis points at the start of March, according to data released on Monday by global bond data provider Cbonds and Investing.com. It is nearing levels seen when former President Yoon Suk Yeol declared martial law on Dec. 3, 2024, when it reached 35.56 basis points.

The CDS premium reflects the cost of insuring against sovereign default. At current levels, it means investors must pay $3,384 annually to insure $1 million worth of Korean government bonds.

In contrast, Israel — currently at war with Iran — saw its CDS premium fall 13.34 percent to 74.55 basis points over the same period, while Saudi Arabia’s dropped 9.05 percent to 80.36 basis points. Compared to Japan, up 4.02 percent to 26.38 basis points, and China, up 7.78 percent to 49.86 basis points, Korea recorded the steepest increase.

Although Korea’s CDS level remains lower than Israel’s or Saudi Arabia’s in absolute terms, the sharper rise indicates greater sensitivity to external shocks.

The dollar-won exchange rate is seen on an electronic display board inside Hana Bank's dealing room in central Seoul on March 30. [YONHAP]

Israel’s risk premium appears to have eased on expectations of direct U.S. involvement, while Saudi Arabia is benefiting from rising oil prices. Korea, by contrast, faces pressure from its heavy reliance on imported energy.

Korea imports about 70 percent of its crude oil from the Middle East, with roughly 68 percent passing through the Strait of Hormuz. Combined with its manufacturing- and export-driven economic structure, this leaves Korea highly exposed to oil price shocks.

Japan, despite having an even higher reliance on Middle Eastern energy — around 95 percent — has seen only modest CDS premium increases, about one-eighth of Korea’s. Analysts point to the yen’s status as a safe-haven currency, which helps limit capital outflows, and to Japan’s higher share of long-term liquefied natural gas contracts, which cushion short-term price volatility.

The Korean won, by contrast, is widely viewed as a risk-sensitive currency. During global crises, it tends to weaken, which amplifies capital outflows and adds pressure on both credit risk and exchange rates.

Korea’s CDS premium had remained stable in the 20 basis point range until early March, before jumping sharply as concerns over a prolonged Middle East conflict intensified.

A blaze is seen at an industrial building and a fuel tanker at an Israeli oil refinery after the facility was hit by debris from an intercepted Iranian missile, amid the U.S.-Israel conflict with Iran, in Haifa, Israel, on March 30. [REUTERS/YONHAP]

Markets are particularly concerned about a prolonged crisis. Capital outflows could further weaken the won, pushing up import prices. Rising government bond yields would also increase borrowing costs for companies.

Still, the risk of a full-blown financial crisis remains limited, according to some analysts, who cite Korea’s $427.6 billion in foreign exchange reserves and its current account surplus. The implied default probability based on CDS — assuming a 40 percent recovery rate — stands at a relatively low 0.56 percent.

“Korea’s economic structure, with a heavy reliance on heavy and chemical industries, makes it vulnerable to Middle East shocks,” said Joo Won, deputy director of the Economic Research Department at the Hyundai Research Institute. “Combined with a relatively small financial market and high dependence on the dollar, it shows Korea has yet to fully reach the level of advanced economies.”’

“As long as a resource-poor country maintains a manufacturing-centered structure, exposure to such crises is bound to recur,” said Yang Jun-sok, a professor of economics at the Catholic University of Korea.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY KIM WON [[email protected]]