By Na Jeong-ju
The escalating tension over North Korea's threats is sending a shudder through the financial markets here, pulling down stock prices and fueling currency fluctuations.
This indicates that investors are feeling increasingly uneasy about the North's bellicose rhetoric, although most analysts predict the risks will be short-lived and the markets will recover quickly once the tension eases.
The benchmark KOSPI closed at 1,920.74, Tuesday, down 4.2 percent from 2,004.89 at the end of March.
The local currency also lost ground sharply against the dollar during the same period, ending at 1,138 won, compared to 1,111 won in late March.
Moody's Investors Service said North Korea's recent announcement that it will restart production of weapons-grade plutonium, combined with other recent belligerent actions that it has taken, is a "credit negative" for South Korea.
"That marks an escalation of tensions beyond mere rhetoric and thus increases unpredictable geopolitical risks," Moody's analyst Thomas Byrne said in a report. "Nonetheless, as we have stated previously, South Korea's economic fundamentals are strong and have proven resilient to past North Korean provocations."
The analyst said North Korea's untested 30-something leader Kim Jong-un may be feeling pressure to take action to prove his merit with the military, and this increases the chance of a serious military clash between the two Koreas.
The jitters among investors are expected to grow for the time being.
The Korea Exchange said the volatility in the financial markets here surged from a month earlier, largely due to the heightened geopolitical risks.
The KOSPI 200 Volatility Index, a gauge of the local bourse's volatility, came in at 18.29 on Monday, rising sharply from 14.34 tallied at the end of March. The figure once surged to 19.32 during Friday's trading session, marking the highest rate since it hit 19 on October 26, 2012.
Park So-yeon, an analyst at Korea Investment & Securities, said the financial markets may remain volatile for a while.
"We are unlikely to experience an extreme situation such as an all-out war, but the domestic market may remain vulnerable to risks stemming from North Korea," she said.
Last week, top finance officials held an emergency meeting, and vowed to take preemptive measures to stabilize the financial markets if there is any sign of "abnormality."
"In the past, North Korea's rhetoric had little impact on the financial market. But things are different now, and the impact could last for a longer period," said an official from the Ministry of Strategy and Finance.
North Korea had ratcheted up its bellicose rhetoric over the past days. Moody's said the North's threats had minimal adverse effects on market sentiment in Seoul, but the current situation has moved beyond its typical rhetoric and thus is more dangerous.
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