Korea embargo adds to market’s political fear

By Edward Hadas
May 25, 2010

By Martin Hutchinson and Edward Hadas

Investors rarely like wars or rumors of war. But for global markets, the renewed military tension on the Korean peninsula comes at a particularly sensitive time. The threat to this fairly big economy — South Korea’s GDP is four times larger than Greece’s — adds to the impression of a world out of control.

South Korea’s response to confirmation that the North torpedoed a Southern naval vessel in March seems proportionate, merited and economically minor — sanctions will hit an annual trade of only $286 million, about 0.3 percent of South Korea’s GDP. The effect on the already impoverished Northerners may even be mitigated by China, Pyongyang’s traditional ally.

In more settled economic times, markets could probably absorb this increase in Korean tension without too much difficulty. Everyone knows North Korea is dangerously unpredictable. Investors usually respond to provocative actions with only a brief flurry of worry. They sometimes even interpret aggression as desperation, and dream of potential gains from eventual Korean unification.

This time could be different. As of Tuesday, the Korean stock market had dropped 8 percent since the official report on the sinking, and the won had fallen by a similar proportion against the dollar. Investors may be thinking South Korean companies will face higher capital costs or that military expense will hold back the country’s growth. Or they may just be blindly shunning geopolitical risk.

The fear is likely to be exaggerated. An all-out war can probably be avoided, even if North Korea’s announcement of a freeze in relations leads to direct military confrontations. What’s more, while the Korean economy is bigger than Greece’s, it accounts for only 1.5 percent of global GDP. The euro zone contributes 22 percent.

The political forces which threaten the Koreas are completely different from those that are shaking confidence in the euro zone. But there is one unfortunate similarity. Until a few months ago, the governments, which had responded so powerfully to the financial crisis, were a comfort to markets. But weak and wild policies around the globe are undermining that conviction.

Comments

North Korea is just responding to the weakness it sees in the west and the obama administration in particular.When will the progressives wake up and learn from the mistakes of the past.Will it take another world war? As the disparity between the have and have nots grows,the quasi socialist ecomomies of europe begin to crumble from within,I grow increasingly more confident that the obama grand plan is just that-WWIII.This administration better wake up because the clock is ticking..

Posted by jacattack | Report as abusive
 

It doesn’t help that a foreign-affairs neophyte is sitting in the White House, practicing diplomacy crafted by Oprah. ‘Engagement’ indeed. The sooner America comes to its sense and offloads this character and replaces him with someone even halfway competent – which shouldn’t be difficult – the better.

Posted by Gotthardbahn | Report as abusive
 

I don’t think governments responded powerfully to the financial crisis. The bankers stole so much money from the financial system that the public had to restore some of that money. Basically, the government submitted to the will of the bankers. Governments of the West are extremely weak, and the next decade is going to reveal this.

Posted by murfster | Report as abusive
 

Perhaps we should consider bringing our troops home and focus on building a better society.

Posted by Neau12 | Report as abusive
 

@ “a foreign-affairs neophyte”… give it a break! Did you consider Bush to be a scholar in foreign affairs? I remember him stumbling over basic questions about countries like a very dull schoolboy. Why do Republicans feel the need to constantly deride and undermine President Obama, especially when their own recent offerings –Bushes, Reagan, Ford Nixon– have decidedly not been at the top of the intellectual or ethical gene pool.

Posted by Tippytoe | Report as abusive
 

As long as the thugs the run the banking cartels (the Fed, and the rest of them) dictate our economy, print money from nowhere, populate inside positions within the highest offices in the land… you can expect the US military to be nothing more than the a “private police force” for the global interests of the elite power structure. We have no Government for the people. Change? What Change? More of the same. North Korea know this better then the American public.

Posted by 1800News | Report as abusive
 

Here’s my proposal to solve the problem of North Korea. The U. S. should negotiate a “treaty” with China whereby China would occupy North Korea soon and the U. S would eventually withdraw its committment to support Taiwan’s independence. At some future date (2050) the two Koreas would be re-united and China would have extended its hegemony to its neighboring countries.

Posted by IrishStout | Report as abusive
 

North Korea has always been a hairy mole growing on the face of south east Asia for the past half century, and one day the doctor will say : no option left but to cut it off.
I just hope that it does not turn malignant before that, and by malignant, I mean nukes being fired all around.

Posted by Uriel | Report as abusive
 

When something happens, we usually search for evidences, and next, we ask who will be the most benefitor. Sometimes latter be more important factor… On June 2nd, National Election for 8 position of regional governer scheduled… and at this point who is the beneficiary is so clear. It’s like our clock is rewind to 10 or 20 years before.. Shameful…

Posted by feelthelife | Report as abusive
 

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