Q+A: How serious is the crisis on the Korean peninsula?

By Jack Kim

SEOUL (BestGrowthStock) – South Korea said Sunday it would take the case of its sunken naval vessel to the U.N. Security Council in a bid to tighten the economic vice on impoverished North Korea after accusing it of torpedoing the ship last March, killing 46 sailors.

Late last week, the North said Seoul was driving the peninsula to war.

Following are some questions about how serious the crisis is and what may be behind North Korean leader Kim Jong-il’s provocative moves.

WILL THERE BE WAR?

Most analysts doubt there will be war on the peninsula as long as South Korea holds its fire.

North Korea’s obsolete conventional armed forces and military equipment mean quick and near certain defeat if it wages full-scale war, and Pyongyang is well aware of its limits.

Even though it has exploded nuclear devices, North Korea does not appear to have a working nuclear bomb. Experts say they do not believe it has the ability to miniaturize an atomic weapon to place on a missile.

Its aging fleet of Soviet-era bombers would also have difficulty evading the technologically advanced air forces of regional powers the United States, South Korea and Japan to deliver a nuclear bomb outside the country.

South Korea has made clear it will not retaliate after findings showed it was a torpedo fired by a North Korean submarine that sunk the Cheonan corvette, killing 46 sailors.

The greatest risk that could fuel armed confrontation lies in small-scale skirmishes that might develop into larger conflict.

Another risk could be the buildup of U.S. military forces on the peninsula that will be seen by the North as a sign of imminent invasion, something that leaders in Pyongyang are said to be genuinely frightened of.

WHAT IS KIM JONG-IL TRYING TO DO?

The torpedo attack was likely ordered directly by Kim Jong-il. The most likely explanation for the attack is that it was in retaliation for a naval skirmish last November that severely damaged a North Korean vessel. South Korea says it was also looking for a distraction after a disastrous currency revaluation late last year reportedly led to rare protests against the hardline government.

North Korea had a rough start to the year in terms of economic difficulties after pledging on New Year’s Day to make it a top priority to improve the lives of the people.

The suspension of aid from the South under President Lee Myung-bak since 2008 has deepened its economic woes. U.N. sanctions imposed after last year’s nuclear test have also cut into the North’s key source of hard cash — the trade in arms.

Analysts say the North’s leaders often resort to raising regional tensions to divert attention from troubles at home.

Kim, whose own health appears weak, is trying to promote his youngest son as heir.

There is concern in the South that Kim may be inclined to more lethal provocations because the routine saber-rattling of recent years no longer seems to work to force concessions out of the South and regional powers.

WHAT ARE THE RISKS TO INVESTORS?

President Lee’s government said it plans to take the case to the U.N. Security Council rather than take the law into its own hands.

Market players tend not to bet confrontation between the two Koreas will escalate into armed conflict because they believe Seoul will not risk the damage to its own economy and its powerful neighbors in North Asia, who together account for about a sixth of the world’s economic output.

In South Korea, even a nuclear test does little to rattle its financial markets who have become largely inured to the North’s behavior.

But South Korean stocks took a dip and the won posted its biggest daily fall in more than 10 months on the day the South formally accused the North for sinking its navy ship and vowed to take strong countermeasures.

Hawkish comments from both sides weighed on investor sentiment, already fragile after lingering concerns over euro zone debt problems.

Financial markets were closed for holiday in South Korea on Friday but further comments from Lee next week on how Seoul would respond could weigh on sentiments when they reopen for business, reflecting the highest levels of tensions in recent years.

Thursday, five-year South Korean CDS was 10 bps wider at 130/135, the highest since September 2009. Three-year treasury June contracts ended up 7 ticks at 111.14.

Stock Market Report

(Editing by Jonathan Thatcher)

Q+A: How serious is the crisis on the Korean peninsula?