European funds valued at about 5.5 trillion won ($5 billion) are estimated to have pulled out of South Korea’s stock and bond markets since August according to the country’s financial regulators’ data, underscoring the volatile sentiment gripping jittery investors.

The sell-off came after the historic downgrade of the U.S. credit rating by Standard & Poor’s on Aug. 5 touched off global fears that the world’s biggest economy might slip into a recession and European debt woes.

The sudden outflow also deserves attention as European investors, who had long bought Korean bonds, turned net sellers in the past month or so amid heightened awareness about risks spreading across the globe.

The indicators pointing to possible bankruptcies at European banks have already surpassed the level seen during the collapse of Lehman Brothers, while Korean banks also are beginning to show warning signals.

Financial Supervisory Service data shows that European investors have sold a net 3.99 trillion won on the Seoul bourse and 1.47 trillion won in the bond market since August.

Notable is that European investors held a net buying position in the first seven months this year, drawing in bonds worth 1.92 trillion won, though they unloaded a net 7.49 trillion won worth of stocks.

European funds are speculated to have opted for a selling position in the past month after the debt crisis in the region worsened and the outlook for the global economy darkened.

Particularly worrisome for Korean authorities is that European investors are turning into sellers even on the bond market, a channel that has helped soften volatility.

Foreign investors are reducing exposure in Korea’s stock market and other emerging countries, which holds no surprise given the fast-paced developments that send one alarm after another, but their current move on the bond market is likely to have a bigger impact, analysts said.

The risks facing banks in Europe also went up, with the credit default swap for the bellwether BNP Paribas Bank surging 33 basis points on Saturday to 275bp (one basis point is 0.01 percentage point).

The average CDS premium for Korean banks also rose to 158bp, the highest level since Aug. 10 last year when it reached 166bp.

By Yang Sung-jin (insight@heraldcorp.com)