November 24th, 2010
02:53 AM GMT
Hong Kong, China (CNN) – The conflict may be between the two Koreas, but this latest clash between the North and South is a major cause of concern across the world, shaking markets in the U.S. and elsewhere.
North and South Korea artillery exchanged fire for an hour on Tuesday. The attack on Yeonpyeong Island was the first direct artillery attack on South Korea since the 1953 cessation of hostilities.
The Dow Jones industrial average fell 142 points, or 1.3%, to close at 11,036 on Tuesday. The S&P 500 fell 17 points, or 1.4%, to 1,181. The Nasdaq slid 37 points, or 1.4%, to 2495, CNNMoney reported – a sell-off sparked by the crisis in Korea, as well as continued concerns over Europe’s debt crisis and a grim outlook by the U.S. Federal Reserve.
Yet underneath the panicked selling, something new can be seen in South Korea’s financial response to this latest crisis.
As President Lee Myung-bak assembled a meeting of South Korean leadership in a bunker underneath Seoul, the country’s top economic policymakers also met in emergency session within hours of the strike. They issued a statement that the government stands ready to tap its foreign reserves in case panic dries up liquidity in the Korean markets.
"Timely action will be taken if excessive herd behavior is detected ... and the Bank of Korea (is) set to cooperate on stabilizing the market," the finance ministry said in a statement after the meeting, according to state news agency Yonhap.
The result? Although the value of the won cratered overnight, dropping to 1,170 to the dollar from its 1,125 Tuesday close, within an hour of markets opening on Wednesday the won was back up to 1,145.
The worst market reaction to Korean Peninsula tensions was in October 2006, when North Korea detonated a nuclear weapon underground, said Kwon Goohoon, co-head of Korean research at Goldman Sachs in Seoul.
“At that time the Korean won weakened sharply and took 13 days to recover,” Kwon said. The Kospi Index, Korea’s primary stock market, took five days to recover.
“This time, despite the seriousness of this particular, the market seems to be more confident,” Kwon said.
The government’s financial response to the shelling came much quicker than past crises, Kwon said. “I think there’s been a learning curve, given the volatility over the last two years in context of the subprime crisis,” Kwon said of the proactive steps Korean policy makers took to calm investor worries.
So it could have been much worse. But there remains one unknown.
“If there is no further provocation, we expect the markets will stabilize,” Kwon said. “The only concern right now is how North Korea will react.”
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