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(2nd LD) Financial markets almost unscathed from N. Korea shock

All Headlines 16:24 November 24, 2010

(ATTN: RECASTS headline, lead; UPDATES with closing prices, expert comments in para 2-5)

SEOUL, Nov. 24 (Yonhap) -- South Korean stocks and the local currency pared deep losses in early trading to close with modest losses Wednesday after North Korea's artillery attack initially spooked investors.

The benchmark Korea Composite Stock Price Index (KOSPI) closed at 1,925.98, down just 0.15 percent from Tuesday's close in the first session after the North's artillery attack. The stock index recovered most of its earlier losses after opening as low as 2.33 percent.

The South Korean currency ended at 1,142.3 won to the U.S. dollar on the local market, down 4.8 won from Tuesday. The currency also subdued its downturn somewhat after starting the session at 1,175 won to the greenback, the lowest level since the 1,176.8 won closing in Sep. 7.

Experts said investors partly returned back to the financial market on increased assurance the inter-Korean military tension would not escalate further.

"Investors have been assessing whether the North would add further attacks and whether the South would take to military retaliation," said Chung Kyung pirl, an analyst at Korea Exchange Bank. "As both questions turned out to be little probable, investors recovered some confidence, but the currency may undergo some downtrend for a short while."

Geopolitical tension escalated on the Korean Peninsula after North Korea a day earlier shot a barrage of artillery rounds onto Yeonpyeong Island, a South Korean island located near the sea border with the communist country.

South Korea fired back and immediately responded to the attack on the populated island, which left two South Korean marines dead, dozens wounded and scores of civilian houses and government offices ablaze.

The foreign ministry of the South defined the attack as a "clear provocation" from North Korea that violated multiple agreements between the two separated nations.

The two Koreas technically remain at war since the 1950-53 Korean War ended in a truce rather than a peace treaty.

Financial authorities, however, reassured investors that the geopolitical risk may only have a limited impact on the local financial sector due to the country's solid economic conditions.

"Unless the event further worsens, the impact will be only temporary given similar incidents in the past," the finance ministry said after holding an emergency economic policy meeting early in the morning with officials from the central bank and financial regulators.

The country has enough economic capacity to absorb the external shock and it will respond with market-stabilizing measures, including provisions of the local and foreign currencies if such needs arise, the ministry also noted.

Global credit rating firms also played down the repercussions of the inter-Korean tension on the South's economic standing and said the incident will not affect their view on the country's creditworthiness.

"We consider that the materialization of geopolitical event risk, a low probability but high severity event, is contained by the strategic interests of the U.S. and China and as such, geopolitical risks as currently assessed will not adversely affect South Korea's rating," Tom Byrne, a vice president at Moody's Investors Service, said in an e-mailed note.

"We believe that South Korea's strong credit fundamentals continue to support the government's A1 rating and that the outlook remains stable."


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