How Do the Norks Rankle Us? Let Us Count The Ways...

Reuters has a nice run-down of possible antagonistic scenarios triggered by the Norks

MISSILES, ARTILLERY AND TAUNTS

North Korea's typical sabre-rattling includes short-range missile tests, brief skirmishes with the South and threats to attack its capitalist neighbour. Markets are long used to this.

While the first instance of renewed grandstanding will likely cause a brief dip in South Korean stocks <.KS11) and the won KRW=, losses will be quickly reversed, probably by the following trading session at the latest.

BALLISTIC MISSILES

Mid-range ballistic missiles are designed to hit Japan and U.S. military bases in Guam and other parts of the region. They have already been deployed and the North is trying to improve their range and accuracy.

If the North demonstrates improved missile technology, it increases the long-term risks to the region, and market jitters might ripple beyond South Korea to affect sentiment on Japanese stocks .N225 and the yen JPY=.

But unless markets thought there was a chance Kim was moving closer to firing these missiles in anger at targets in Japan or elsewhere, any sell-off would be modest and quickly reversed.

NUCLEAR TEST

North Korea has tested nuclear devices twice. A third test would put it closer to having a working nuclear bomb, but it would also deplete its meagre supply of fissile material, which is thought to be enough for six to eight bombs.

Experts say even if North Korea develops a bomb, it has no practical means to deliver it because its Soviet-era bombers would be no match for U.S., Japanese and South Korean air forces in the region.

Because a third nuclear test would not significantly alter market perceptions of the risks posed by North Korea, any negative impact on asset prices would again be relatively small and short-term.

NUCLEAR WARHEAD

North Korea's demonstration of a working nuclear warhead would alter the security balance in Asia. The North's current arsenal of mid-range missiles could deliver a nuclear warhead, which would put at risk North Asia, which is responsible for one-sixth of the global economy.

This is a scenario that would be far more serious for markets. A sharp short-term sell-off of South Korean and probably also Japanese assets would be likely, and there would also be a flight to safe havens like sovereign bonds and gold. Longer-term, asset prices would continue to reflect a larger risk discount as a result of the increased danger from the unpredicatble North.

However, experts say the North is several years away from developing the technology needed to miniaturise a nuclear weapon to mount on a missile, and many question whether it will ever be able to master the difficult process. So for the moment this is not a scenario that markets pay much attention to.

NUCLEAR PROGRAMMES

If North Korea restarted all of its plutonium-producing Yongbyon nuclear plants, this would increase the long-term security risks to the region. When fully operational, the Soviet-era facility can produce about a bomb's worth of fissile material a year.

Uranium enrichment, the second path to fissile material, can be done away the prying eyes of spy satellites making it more problematic than plutonium, which requires massive facilities.

Experts say the North's enrichment programme appears to be in its infancy and do not see it as a significant risk to regional security. They also say that while it is easier to build a nuclear bomb with highly enriched uranium than plutonium, it is more difficult to build a nuclear warhead with HEU.

So unless North Korea sprang a real surprise by unveiling nuclear capabilities far more advanced than current estimates, markets would not react with much concern.

By: Brant