Kospi Drops Most in 4 Months on North Korea Threats

South Korea’s stocks tumbled the most in more than four months and the won sank to a half-year low as the risk of conflict with North Korea curbed demand for the nation’s assets. The cost of protecting sovereign bonds against default climbed to the highest since September.

North Korea ratified a law this week authorizing plans for “counter-actions” against U.S. aggression including a nuclear strike, official media reported today. The communist nation in the past week said that a “state of war” exists with the South, announced plans to restart a mothballed nuclear plant and prevented South Korean workers from entering a jointly run industrial park at Gaeseong, on its side of the border.

“North Korea is heightening its threats day by day and that risk factor is having a negative impact on South Korean financial markets,” said Jeon Seung Ji, an analyst at Samsung Futures Inc. in Seoul. “Rising tension is prompting foreign investors to sell more Korean stocks, weakening the currency. In the meantime, exporters are likely to look for a point to sell dollars.”

The Kospi index fell 1.2 percent to 1,959.45 at the close in Seoul, its steepest loss since Nov. 15. The won dropped 0.5 percent to 1,123.71 per dollar, after touching 1,125.50 earlier, the weakest since Sept. 13. The currency slumped 5.3 percent in the past three months, Asia’s second-worst performer, as tensions with North Korea escalated.

Bond Risk

The North detonated a nuclear device in February, prompting a tightening of United Nations sanctions, and the U.S. and South Korea began military exercises last month that included flights over the Korean peninsula by U.S. stealth bombers. The South’s Defense Ministry said today it sees no unusual North Korea troop movements or signs of imminent attack.

North Korea for the second day restricted entry for South Koreans to the special economic zone in Gaeseong, allowing only those already staying in the park to leave. The North yesterday notified South Korean businesses to leave Gaeseong by April 10, Yoo Dong Ok, a spokesman for Gaeseong companies said by phone today. The South’s Unification Ministry said that claim is a “misinterpretation” of North Korea’s regular request for the South to submit its plan for cross-border movements.

The cost of insuring South Korea’s debt against non-payment with credit-default swaps rose four basis points to 86 yesterday, the highest since September, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Government bonds were steady. The yield on South Korea’s

2.75 percent notes due March 2018 was unchanged at 2.56 percent, according to prices from Korea Exchange Inc. The five-year yield reached 2.51 percent last week, the lowest according to data compiled by Bloomberg going back to 2000.

Defense Stocks

South Korea’s presidential office yesterday denied pressuring the central bank to lower interest rates, after chief presidential adviser for the economy Cho Won Dong told reporters that a cut would be beneficial since the government may need to issue bonds to finance a supplementary budget.

The Bank of Korea’s policy makers next meet on April 11 to review the benchmark rate, which has been kept unchanged at 2.75 percent since a 25 basis-point cut in October.

More than 120 South Korean companies including apparel company Shinwon Corp., underwear manufacturer Good People Co. and watchmaker Romanson Co. employ more than 53,000 North Korean workers at Gaeseong, located about 10 miles (16 kilometers) north of the demilitarized zone. Shinwon’s shares slumped 4.2 percent in Seoul today, while Romanson declined 2.6 percent.

Victek Co., a maker of electronic warfare equipment, jumped 15 percent, pacing gains among South Korean defense stocks. Firstec Co., a maker of components for helicopters and armored vehicles, rose 10 percent, while Speco Co. surged 15 percent.