North Korea’s Defaulted Debt Gains on Weapons Talks

John Glover

North Korea’s defaulted debt, virtually worthless five years ago, is gaining as investors bet that talks to terminate the communist nation’s nuclear weapons program may eventually end the country’s isolation.

The securities are priced at 24 cents on the dollar, according to Exotix Ltd., a London brokerage. That’s up from 18 cents last October after the government in Pyongyang said it detonated a nuclear device. The debt traded at 13 cents in 2003.

President Kim Il Sung drove the country to become the first communist state to default in the 1970s by spending as much as 30 percent of gross domestic product on its military. His son, Kim Jong-Il, continued the legacy by maintaining a 1 million- strong army in a nation where the 23 million population was wracked by famine through the 1990s and forced to eat weeds and corn stalks, according to the Central Intelligence Agency. North Korea resumes nuclear weapons talks on March 19 in Beijing.

“This is a very long-term play,” said Richard Segal, chief strategist at Argonaftis Capital Management, in a telephone interview in London. The notes “will be worth 100 one day, but you don’t know when that will be,” Segal said.

North Korea probably owed as much as $14.5 billion, including unpaid interest, at the end of 2004, according to Exotix. Kim, known by the honorific “Dear Leader,” has held supreme power since the 1994 death of his father, creating the world’s first communist dynasty.

Trading Debt

BNP Paribas SA, France’s biggest bank, in 1987 created the equivalent of $164 million of notes denominated in deutsche marks and secured by two non-performing loans made to North Korea. They are traded alongside 240 million Swiss francs ($197 million) of notes secured by the same loans.

The securities were created to make it easier to trade North Korean debt. At maturity in March 2010, holders of both securities will receive the underlying defaulted loans if the notes haven’t been repaid or restructured, according to data compiled by Bloomberg.

Investors expect South Korea to “assume its neighbor’s external debt if economic integration is sufficiently advanced,” Exotix says on its Web site. Payment may not include the overdue interest, Exotix says.

“Moves in this debt are in anticipation of talks on North Korea’s nuclear weapons program,” said Stuart Culverhouse, chief economist at Exotix in London. “The talks are the driver, and the price of the debt ultimately depends on whether any accord reached will hold.”

Food Exchange

Mohamed ElBaradei, head of the International Atomic Energy Agency, said today in Beijing after visiting Pyongyang that North Korea will allow United Nations nuclear inspectors into the country once the U.S. lifts sanctions against the country.

Under the terms of a six-nation accord brokered on Feb. 13 in Beijing, the communist state agreed to dismantle its nuclear program in exchange for food aid and energy assistance.

More than 10,000 North Koreans have escaped since the country divided in 1953, according to South Korean news service JoongAng Ilbo News. Since 2004, those caught attempting to escape face, or repatriated by China, face terms of between one and five years in jail, according to a report by Human Rights Watch on its Web page.

At a 2002 summit, North Korea admitted to kidnapping 13 Japanese in the 1970s and 1980s, and allowed five to return in October 2002. Japan says 17 people were taken and must be accounted for.


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