South Korea markets plunge on news North Korea is preparing for war

South Korean stocks continued to fall Tuesday on reports that North Korea was preparing for military action and had accused the South's Navy of trespassing.

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    A currency trader reacts in front of screens showing the Korea Composite Stock Price Index (KOSPI), left, and foreign currency rate at the Korea Exchange Bank headquarters in Seoul, South Korea, Tuesday. South Korea stocks hit a 3-1/2-month low Tuesday amid reports that North Korea was preparing for war.
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South Korea stocks hit a 3-1/2-month low Tuesday amid reports that North Korea was preparing for combat and had threatened military action.

Yonhap news agency initially reported today that the North was preparing for war, although this was later clarified to say that the North only intended to retaliate if attacked, according to Reuters. Separately, Yonhap also reported that the North accused South Korea's Navy of trespassing in its territorial waters from May 14 to 24, and warned of military retaliation, according to CNN.

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Markets in South Korea and the region plunged, a reflection of how volatile the situation remains after a multinational probe last week squarely blamed North Korea for sinking a South Korean ship with a torpedo on March 26, killing 46. South Korea's main stock market index fell 2.8 percent and the won fell 3.7 percent against the Japanese yen, according to Bloomberg.

Reuters said investors were closely watching how tensions play out:

"The Yonhap report ... chilled investor sentiment as it highlighted South Korea's geopolitical risks. And the timing for such news could not be worse, as market sentiment was already shaky with renewed eurozone financial fears," Hwang Keum-dan, a market analyst at Samsung Securities, told Reuters. "The stock market will have a hard time recovering until these two big uncertainties are somewhat resolved."

South Korean financial officials will hold an emergency meeting Wednesday to discuss how to calm markets, according to Reuters.

"Geopolitical risk is unpredictable, and people were totally shocked today [by news of North Korea's combat-readiness order]," Oh Tae-dong, a strategist at Taurus Investment & Securities, told Dow Jones. "But I think today's sharp drop in stocks seems to have reflected worries over possible military clashes between the two Koreas. I suggest investors refrain from dumping out of panic ... as I don't think war would break out on the Korean peninsula."

Kim calls to arms

News of Kim Jong-il's call to arms was published on the Korean-language website of North Korean Intellectuals Solidarity, a Seoul-based group of defectors from the North who oppose the Pyongyang regime. The website quoted a North Korean broadcast from May 20 as saying, "We do not hope for war but if South Korea, with the US and Japan on its back, tries to attack us, Kim Jong-il has ordered us to finish the task of unification left undone during the ... [Korean] war," according to Reuters.

"North Korea is holding massive rallies around the country to denounce South Korea and the United States," an article on the defectors' website said, according to the Korea Times. "All participants, even civilians, must wear military uniforms."

Meanwhile, Yonhap also on Tuesday quoted a North Korean official reacting angrily to the South Korean Navy's alleged incursion into its waters, according to CNN. "This is a deliberate provocation aimed to spark off another military conflict in the West Sea of Korea and thus push to a war phase the present north-south relations," the official said in a statement.

Lee calls North 'main enemy'

On Monday, President Lee Myung-bak, vowing to prevent any repetition of North Korean “brutality,” suspended North-South trade and an agreement that gave North Korean vessels the right to go through South Korean waters around the southern end of the peninsula. Those measures, plus a diplomatic campaign to get the United Nations Security Council to impose sanctions, raised the specter of a wide range of North Korean responses, The Christian Science Monitor reported Monday.

The Korea Times reported Tuesday that Mr. Lee said North Korea would be designated the South's "main enemy" in a defense white paper, breaking with tradition of the last six years when Pyongyang was not singled out in the interest of reconciliation.

"For the past decade, we have lived without the concept of a main enemy. We have focused on potential threats outside the Korean Peninsula, but ignored the direct threats from North Korea," Lee said at a meeting with his security advisers, according to the Korea Times.

The move comes after South Korea on Monday dusted off loudspeakers near the Demilitarized Zone separating it from North Korea on Monday, in preparation for resuming propaganda broadcasts over the border for the first time in six years, the Chosun Ilbo reported. The North replied that it would "open fire to destroy" the loudspeakers if they crackle back to life, the Chosun Ilbo said, quoting the official KCNA news agency.

The Associated Press reported that broadcasts began today.

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