Seoul, November 24, 2010--In wake of North Korea's artillery bombardment of the South Korean island Yeonpyeong on Tuesday November 23, the nation is on edge. Analysts are referring to this situation as 'a pattern of aggressive actions' by the communist government when it feels under stress or threatened.
The South Korean military went to "crisis status" and threatened military strikes to the North after they fired dozens of shells at the South Korean island, killing two South Korean soldiers and setting off an exchange of fire in one of the fiercest clashes between the two sides in decades. The South Korean Defense Ministry said that in addition to the two soldiers who were killed, 15 other soldiers and 3 civilians were wounded.
The chief presidential spokesman, Hong Sang-pyo, commented that President Lee Myung-bak would assure "a strenuous retaliation" if there was any further provocation, as the government officials met with security-related ministers and senior aides in the underground situation room at the Blue House.
The official North Korean news agency said in a brief statement on Tuesday night that the South "recklessly fired into our sea area." The attack on Yeonpyeong came as 70,000 South Korean troops were beginning an annual nationwide military drill called 'Safeguarding the Nation'. The exercise has been harshly criticized by Pyongyang as "simulating an invasion of the North" and "a means to provoke a war." American officials said the South's military exercise had been announced well in advance, and should not have come as a surprise to the North.
Yeonpyeong Island sits just two miles from the Northern Limit Line, the disputed sea border which the North does not recognize, and only eight miles from the coast of North Korea. A garrison of roughly 1,000 South Korean marines and nearly 1,600 civilians occupies the island; fishermen make up most of the civilians there. This incident instigated a fleeing response of over 200 residents by ferry or fishing boat from Yeonpyeong Island to the mainland town of Incheon, South Korean news media reported.
Artillery conflicts between the two countries have not been unusual in recent years, but Pyongyang's attack on a civilian-populated target was different from previous moves. They usually take the form of military clashes in disputed waters around Yeonpyeong Island. North and South Korean warships have fought in these waters three times since 1999. The most recent clash came last November, when an exchange of fire damaged patrol vessels of both nations.
Their already tense relations have worsened causing what John Swenson-Wright, an expert with the Royal Institute for International Affairs calls "a serious escalation." Although the North and South have clashed at sea before, most notably was the sinking of a South Korean warship, the Cheonan, which resulted in the death of 46 sailors in March 2010. If the sinking was the work of the North, it would be the most lethal military attack since the end of the Korean War in 1953.
Choi Jin-wook, a North Korea expert at the Korea Institute for National Unification, a research institute in Seoul, linked the North's deliberate provocation against the South to food aid saying "It's a sign of North Korea's increasing frustration." He added "Washington has turned a deaf ear to Pyongyang and North Korea is saying, 'Look here. We're still alive. We can cause trouble. You can't ignore us.' " The North's immediate desperation has caused them to escalate, attempting to take the South as hostage again.
As a result of this aggravation, what will this latest "crisis status" do to the economy Recently we have been seeing U.S. dollar rates decline, reaching closer and closer to being one-to-one (or as close as we can get) with the Korean won. Tuesday's attack came too late to affect the South Korean KOSPI stock market, but next day outcomes showed that the won took a beating, experiencing its biggest one-day drop in several months and touching a three-month low of KRW 1,170/US$ at one point, from KRW 1,126/US$ at the open. As for stocks, they declined after North Korea fired artillery at the South and Government bonds recovered from its initial losses.
This is a blow to South Korea's otherwise booming economy, one that might have credit rating consequences. Shares on Wall Street have declined since November 23rd resulting in heightened uncertainty over the conflict in Korea in addition to the debt crisis in Europe which has sent investors fleeing for safer assets. Traders have been confronted with tensions on two continents. The "economic war room" South Korea's finance ministry set up is a 24-hour emergency financial monitoring system. Officials say they are scrutinizing Korean indexes and if there are any moves by credit rating companies and investors they will supply "ample" liquidity if needed to keep financial markets stable, and is prepared to act to counter "herd" behavior. Hopefully South Korea is conscious of the impact of conflict on its financial markets and its position as Asia's fourth-biggest economy.
Lee Young Seong, a Seoul-based portfolio manager with Korea Investment Trust Management Co. said, "The shock is starting to fade so the impact may be limited." One can hope he is correct in stating this, he then added "foreign and institutional investors are seeing the plunge in stocks as an opportunity to buy."
This sharp influx in currency (post the North Korean attack on the South) keeps the world market at bay once again, particularly for Korea as the Korean economy typically teeters on the status of the American economy. Fortunately, the recent circumstances have prompted the central bank to announce that it would act to stabilize the markets if necessary. As a whole, when you combine tensions in Korea, debt worries in Europe, hedge fund investigations, and a weak housing report; there's a tremendous amount of bad news to absorb. That's not going to encourage a risky appetite for the populace.
