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Warning over N. Korea collapse

North Korea relies heavily on overseas food aid to feed its population.
North Korea relies heavily on overseas food aid to feed its population.

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The humanitarian situation in North Korea has gone from bad to worse.
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(CNN) -- A sudden and dramatic collapse of the North Korean state is just a matter of time and will place a huge financial burden on the neighboring South, one of the world's leading credit ratings agencies has warned.

John Chambers, managing director of sovereign ratings at Standard & Poor's, said the inevitable economic collapse could cost South Korea up to 300 percent of its annual gross domestic product.

South Korea's GDP is about $450 billion a year, suggesting a cost to Asia's fourth largest economy of up to $1.35 trillion -- far higher than earlier estimates by other economists.

Chambers told CNN Tuesday the North's collapse was "ineluctable". On timing, he said it could be soon or in the medium time. Either way, it would cost the South "dearly".

Chambers said that depending on decisions taken by the government in the South, the cost of reunification could range from 40 percent of annual GDP to three times GDP, over a period of years.

In anticipation of the North's collapse, S&P said South Korea should step up its financial preparations.

The New York-based agency said such an event would likely have a greater impact than the 1997-98 Asian financial crisis that devastated many South Korean banks and the much of the nation's corporate sector.

Despite the warning however, S&P said the rating for South Korea remained stable and it had no plans to revise it.

South Korea's economy bounced back strongly to grow at more than 6 percent last year, but its performance this year has been hit hard by escalating tensions on the Korean peninsula.

"Unless South Korea has substantially built up fiscal reserves in the meantime, its ratings would fall from their current level upon sudden reunification of the peninsula," S&P said.

North Korea, ruled by reclusive leader Kim Jong-il, is already unable to feed its 23 million people and relies heavily on outside food aid.

Its decrepit economy, which suffers from a lack of energy, basic foodstuffs and transport infrastructure, is burdened by a massive military budget.

The North has more than a million men and women under arms -- one of the largest standing armies in the world -- and spends large amounts on its weapons program, including, it is thought, the development of ballistic missiles and its nuclear program.

Much of the North's foreign revenue earnings are thought to come from trafficking of narcotics, counterfeiting and the sale of weapons.

According to the Washington-based Center for Strategic and International Studies, U.S. and South Korean military researchers estimate that North Korea exports $500 million of narcotics annually.

As well, its sale of ballistic missiles to Pakistan, Iran and Middle Eastern countries raised $580 million in 2001, researchers say.

North Korea is at the center of tensions in North Asia, following a breakdown in relations with the United States last year that has yet to be resolved.

Although South Korean President Roh Moo-hyun has followed the conciliatory so-called "sunshine policy" towards the North adopted by his predecessor Kim Dae-jung, this has yet to show any benefits.

Dire situation

North Korea's massive military takes up most of the country's few resources.
North Korea's massive military takes up most of the country's few resources.

With much of the world's attention focused on North Korea's alleged nuclear weapons program, hundreds of thousands of North Korean citizens are believed to live in a state of semi-permanent starvation.

In August the United Nations' World Food Program warned that the food situation would worsen over the ensuing six months, placing many more at risk as the cold winter sets in.

The present dispute erupted a year ago when the United States said North Korea had admitted to a nuclear weapons program and Pyongyang then pulled out of the nuclear Non-Proliferation Treaty.

Six-way talks in August involving the two Koreas, the United States, Russia, China and Japan failed to resolve the row.

North Korea has agreed in principle to a new round of discussions which could start next month, although no formal date has yet been set.

S&P said Monday that even if multilateral talks produced an agreement, it would take time to see whether this was upheld any better than the defunct 1994 Agreed Framework between Pyongyang and Washington.

The views of S&P and other international ratings agencies are important as they influence the interest rate South Korea pays on its loans.

Earlier estimates of the cost of reunification for South Korea range up to $250 billion in the first 10 years, extending out to $840 billion over a 40 to 50-year period.

Reuters news agency reported that S&P was closely watching for any effect on South Korea's economic reforms from plans by President Roh for a referendum on his rule.

Roh shocked the country when he proposed an unprecedented referendum next month on his rule after a close aide was arrested for taking bribes.

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