N. Korea Reprocessing Is Credit Negative for South, Moody’s Says

North Korea’s decision to restart production of weapons-grade plutonium is credit negative for South Korea because it marks an escalation of tensions beyond rhetoric, Moody’s Investors Service said.

While South Korea has proved resilient to North Korea’s past provocation, recent developments have increased the level of geopolitical risk on the Korean peninsula, Moody’s analysts David Erickson and Thomas Byrne wrote in a report today.

“North Korea’s belligerent actions are credit negative for South Korea because they have increased the chance of a serious military clash,” the analysts wrote in the report. “This is particularly so as both sides have new leaders.”

Tensions on the peninsula are at the highest since at least 2010 after North Korea authorized its military to conduct a nuclear strike while restricting South Korean access to a jointly managed industrial zone. The U.S. has responded by flying B-52 bombers and B-2 stealth bombers over the South and dispatched two destroyers to the region in case of a missile launch. South Korea’s government said today North Korea has been ready to conduct its fourth nuclear test since February.

North Korea’s “untested 30-something” leader Kim Jong Un may be under pressure to prove himself to the country’s military, while South Korea’s newly elected President Park Geun Hye has pledged to response to any provocation with military force, Moody’s said in the report.

“The new stance by the Seoul government raises uncertainties about whether it will act as a deterrent or result in spiral of military reprisals if the North were to lash out,” according to the report.

North Korea said April 2 that it will restart facilities at its Yongbyon nuclear site shut by a 2007 disarmament accord, including a uranium enrichment facility and a 5-megawatt reactor that can provide more plutonium for nuclear weapons.

The won slid 0.6 percent to 1,138.60 per dollar as of 11:47 a.m. in Seoul after touching 1,139.30, the lowest since July 27, according to data compiled by Bloomberg.

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