Noland on DPRK sovereign debt

Marcus Noland posted some interesting information on North Korean debt that should be helpful for future researchers:

Back in the 1970s, North Korea borrowed heavily from Western banks and then defaulted. (To be clear, this does not refer to borrowing from the Soviet Union or other Eastern Bloc countries—these are commercial bank loans extended by syndicates involving more than 100 banks from 17 countries.) The loans were rescheduled in 1977, 1980, and 1984, but each time North Korea fell into default. In 1988, the London Club, representing the banks, took North Korea to court and obtained a judgment by the International Court of Arbitration, but even this did not prompt North Korea to settle. The principal and accumulated interest now stands at roughly $3 billion.

BNP subsequently issued three series of certificates which securitize the debt into transferable securities in the name of the NK Debt Corporation (Bloomberg ticker: NKDEBT). These securities trade at a large discount (currently around 5 cents on the dollar) though at the height of the famine, the price of the debt reached more than 50 cents (see Avoiding the Apocalypse Figure 3.5), as it was interpreted as an inverse indicator of regime survivability assuming that in case of a North Korean collapse, South Korea will pay off the debt. There might be challenges to this scenario on the basis of “odious debt” but that is not what the market seems to believe.

You can read previous posts on the DPRK’s debts here.

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  • Go_Bows

    Interesting article, although I think Nolan stretches a bit at the end. I don’t think we have to worry about setting a precedent here. Yes, you can weasel out of debt if you’re willing to flout legal proceedings for decades. You’d just become a pariah state like North Korea. If you’re willing to do that, then servicing debt wasn’t a high concern for you anyway. It seems unlikely that anyone sees this as a practical method of debt relief.

    It sounds like people think the most likely way the debt gets serviced is if the regime collapses and South Korea gets saddled with these obligations. Since the world would be relying on South Korea to help clean up the mess in this scenario, they shouldn’t be on the hook for this “odious debt”. Rather, those that own the debt right now are the ones who are best prepared to be stuck with the “hot potato”. When they took on high risk debt they understood that federal intervention was a possibility. No one is going to have to postpone retirement because their North Korean debt became worthless.

    Considering that over the decades exposure to this debt has been distributed and spread out among many people (Nolan pointed out that any one of us could be holding some), it’s not such a terrible thing if this debt is all written off. All in all, it sounds like an appropriate and acceptable conclusion to an odd chapter of history.


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