Scenarios: Dynamics change as North Korea blamed for ship

By Jack Kim and Jon Herskovitz

SEOUL (BestGrowthStock) – South Korea said on Thursday the evidence was overwhelming that a North Korean submarine fired the torpedo that sank one of its navy ships in March, killing 46 sailors. [nTOE64J00P]

The following is a look at how regional security dynamics could change in the wake of one of the deadliest strikes since the end of the 1950-53 Korean War and the likely reaction in financial markets:

SOUTH KOREA FLEXES ITS MUSCLES

Market players do not see the South planning a revenge strike on the North, but expect it to increase its military presence near the sea border where its ship went down. They worry that Seoul could then be more likely to attack North Korean vessels nearing the border, instead of issuing warnings first, as it has done before, leading to firefights that spook markets.

When news first broke of a possible North Korean link shortly after the vessel, the Cheonan, sank in late March, shares on Wall Street fell, the won dropped and the price to insure South Korean sovereign debt rose to 83 basis points from 78.

KEEPING A LID ON THE SITUATION

The South’s main military ally, the United States, and the North’s biggest backer, China, both see it in regional and global interests to prevent escalation and will pressure Seoul and Pyongyang to keep their tempers and armies under control.

However, the two global powers may not be able to prevent brief, live-fire exchanges between the rival Koreas who station more than 1 million troops near their border.

MISSILES, ARTILLERY AND TAUNTS

But North Korea may persist in saber-rattling that often includes missile tests and threats to attack its capitalist neighbor as it tries to win concessions from global powers to decrease the threat it poses to the economically vibrant region.

Markets are long used to this and do not expect such moves to have any impact on trading. But any test firing of a longer-range ballistic missile designed to hit all of the South, most of Japan and U.S. military bases in Guam would increase long-term risks, and market jitters might ripple beyond the South or the region.

MORE U.N. SANCTIONS

The most feasible recourse for the South will be to enlist the Security Council for tougher sanctions against the North.

This will require convincing China to come on board, involving a long and intricate diplomatic maneuver to bring Beijing around to the argument that in spite of the risks of destabilizing the leadership in Pyongyang, the world must not be left to watch the North get away with unprovoked aggression.

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 meager supply of fissile material, which is thought to be enough for six to eight bombs.

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

Experts say even if North Korea develops a bomb, it has no practical means to deliver it.

SOUTH KOREA REVAMPS MILITARY POSTURE

South Korean President Lee Myung-bak has been critical of the way the navy ship was vulnerable to a torpedo attack and how the military’s chain of command in the immediate aftermath of the ship’s sinking nearly broke down.

Lee has repeatedly said the military must build on the findings of the probe and improve its readiness. There has also been a call to change the military’s focus from passive defense to pro-active deterrence.

Some analysts say such a change would not be effective against the North’s military that itself stresses deterrence, raising the possibility of a direct confrontation.

South Korea will likely upgrade its joint training with U.S. forces, especially on defense against North Korean submarines and torpedo attacks, a move which is certain to provoke the North, which has said such drills are preparations for war.

WAR?

Straight after the South announced the findings of the probe on the sunk ship, North Korea’s powerful National Defense Commission warned of war if Seoul retaliates with sanctions.

North Korea has on previous occasions made bellicose threats to turn Seoul into a “sea of fire” and reduce the South to “ashes”. But military experts do not believe the North’s army is any match for the modern military forces of the South and its ally, the United States.

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(Editing by Alex Richardson)

Scenarios: Dynamics change as North Korea blamed for ship