Moody’s released a report yesterday, outlining the range of potential damage to Korea’s credit profile in the event of armed conflict, depending on length and intensity:

In the case of a short, contained military conflict, the credit implications would be limited. While such a development would hit financial markets and likely lead to capital outflows, Korea has significant external liquidity buffers.

Korea’s economic infrastructure would also incur damage, growth would slow, and inflationary pressures would rise, at least temporarily.

In such a case, the government would likely make use of its fiscal space to support the economy, but the overall financial profile would most likely remain very strong. The impact of such a conflict might also be absorbed without material damage to Korea’s credit profile, though Moody’s might well choose to reflect the downward bias of risk by assigning a negative outlook to its rating.

However, while a limited conflict is conceivable, there is a high likelihood that, once a conflict starts, it would draw in a wider range of countries and last longer than a few weeks. In the case of a longer conflict, the economic and fiscal costs would be significantly higher and Korea’s policy-making and -implementing institutions would come under far greater pressure.

In such a scenario, the sovereign rating would likely move down, potentially by several notches.

In any case, time would be needed to assess the likely impact once a conflict broke out. Moody’s has a number of tools at its disposal to reflect the uncertainty during that period, including the option of placing the rating on review for downgrade while the uncertainty persists.

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