Last Tuesday (23rd November 2010), North Korea unexpectedly attacked the South Korean peninsula “Yeonpyeong”, just 11 kilometres away from the aggressor’s boarder. Market analysts and economists were thus worried about what consequences this attack would have on financial markets. A question that is obviously easier to ask than to answer…
Having been shocked by the latest attacks on South Korea, I tried to figure out what consequences this could have on financial markets. Thus, I came along a blog by Michael Schuman that was posted on the Time’s website called “curious capitalist”. In his post, he is insistent that the current attack should NOT be overvalued. He therefore highlights various historic events where North Korean aggressions have not ended in drastic market reactions. He makes clear that:
“Kim Jong Il’s unpredictability and continued willingness to use lethal force for unknown ends might shake up markets a bit but is unlikely, in my opinion, to have any greater negative impact.
Or at least that’s what history tells us. South Korea’s economy has been one of the world’s best performers over the past 50 years, with North Korea hurling threats (and occasionally something more deadly) throughout that entire growth story. In recent times as well, rising tensions produce little more than short-term market volatility.”
On the other hand, a comment, posted on the South Korean website KBS World, indirectly warns its government of being strategically badly prepared for a possible worsening of the situation. The comment points out that more Won and US Dollars should be pumped into the economy in order to withstand further turbulences on the markets. They even appeal to the Korean central bank to work together closely with the government so that market stability will be kept upright.
One fact is clear: Nobody can surely say how the situation between both countries will develop further.
The situation hasn’t been any tenser in the last five decades and it is already the second time that North Korea threatened its Southern neighbour this year (“North Korea cuts all ties with the South”, the Guardian on 24th May 2010). Analogically, it is the second event in 2010 where news about North Korea unsettled financial markets – at least temporary.
This time, a further shaking of the financial markets depends on North Korean subsequent actions and reactions.