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DPRK in default on ROK food loans

Friday, May 24th, 2013

UPDATE 2 (2013-5-24): South Korea has again requested that the DPRK repay past food loans. According to Yonhap:

South Korea again called on North Korea Friday to repay millions of dollars in loans provided in the form of food since 2000, the Unification Ministry said.

The impoverished North missed the June 7, 2012 deadline to repay South Korea US$5.83 million in the first installment of the $724 million food loan extended to the North in rice and corn. The latest call is the South’s fifth demand made on the North to repay its debt.

Seoul’s state-run Export-Import Bank (Eximbank) sent a message on Thursday to Pyongyang’s Foreign Trade Bank, calling for the repayment, Unification Ministry spokesman Kim Hyung-suk said in a briefing.

The South Korean bank also sent another message the same day, notifying the North of its forthcoming June 7th deadline to repay the second installment of $5.78 million, the spokesman said.

“North Korea should faithfully abide by what they previously agreed to with the South,” Kim said, calling for the repayment of food loans.

Amid a conciliatory mode under the liberal-minded late President Kim Dae-jung, Seoul started to provide food loans to the famine-ridden country, providing a total of 2.4 million tons of rice and 200,000 tons of corn from 2000-2007.

Under the deal, the North is required to pay back a total of $875.32 million by 2037.

Read the full story here:
S. Korea again asks North to repay food loans
Yonhap
2013-5-24

UPDATE 1 (2012-7-15): South Korea claims the DPRK missed a deadline for explaining how it intended to repay South Korean “loans”. According to Yonhap:

North Korea missed the deadline Sunday for notifying South Korea of how it will repay millions of dollars in loans provided in the form of food in 2000, resulting in Seoul having the right to declare Pyongyang has defaulted on its debt, an official said.

South Korea sent the North a message on June 15 that the communist nation was supposed to have paid back US$5.83 million in the first installment of a 2000 food loan worth $88.36 million by June 7. The North was required to respond to the message in 30 days.

That deadline passed on Sunday with the North remaining silent, giving South Korea the right to declare the North has defaulted on the debt, according to a government official in Seoul.

But South Korea is unlikely to go ahead with the declaration any time soon as it would have little effect on the North. The communist nation remains largely outside of the international financial system and the prospect of national default is unlikely to force it to repay its debt.

Officials said they are considering sending Pyongyang a message again calling for debt repayment.

Widespread views are that it won’t be easy for the North, which is still struggling with food shortages, to pay back its debt, but officials said the country could repay the debt in kind as it did before. In 2007 and 2008, the North repaid some debt with $2.4 million worth of zinc ores.

After the two Koreas held their first-ever summit in 2000, South Korea provided the North with a total of US$720 million in loans of rice and corn until 2007. Including interest accrued on the loans, the North is required to repay some US$875 million by 2037.

Such aid has been cut off after the South’s President Lee Myung-bak took office with a pledge to link any assistance to the North to progress in international efforts to end Pyongyang’s nuclear weapons programs.

The Daily NK also covered the story.

ORIGINAL POST (2012-6-8): According to Yonhap:

North Korea has not shown any signs of repaying the loans South Korea extended in food grains since 2000 although the initial day of the scheduled repayment passed as of Thursday. The South Korean government provided North Korea grain loans worth US$725 million for seven years until 2007, including 2.4 million tons of rice and 200,000 tons of corn. The total principal and interest North Korea should repay for the next 20 years is estimated at $875.32 million.

North Korea was scheduled to pay South Korea $5.83 million by Thursday for the loans extended to it in 2000. Korea Eximbank, which is in charge of trade finance with the North, notified its counterpart the Chosun Trade Bank of North Korea of the repayment obligation Monday but North Korea had not responded of Friday.

The former South Korean governments led by President Kim Dae-jung and Roh Moo-hyun provided an estimated 1 trillion won (US$850 million) to North Korea from 2000 to 2007 under the sunshine policy. South Korea provided an additional 1.37 trillion won to North Korea to finance the construction of a light water reactor in order to suspend North Korea’s nuclear development. All the loans to the North were taxpayer’s money.

…

North Korea should show sincerity in the repayment of these loans for the sake of its future. If it fails to do so, the North will encounter substantial difficulties in accessing further loans from the international community. North Korea also has failed to repay loans it borrowed from the old Soviet Union. Russia reportedly had to reduce 90 percent of the Norths loans, worth $11 billion.

If North Korea has difficulties repaying its debts to South Korea in cash, it should sincerely discuss alternative measures to repay the loans with the South Korean government.

The South Korean government should positively consider measures to get the money back in kind, such as in mineral resources. North Korea should understand that if it fails to show the minimum sincerity on the repayment of its debts, it will experience much more difficulty in attracting economic assistance from the outside world.

The Choson Ilbo reports this additional information:

In 2007 and 2008, South Korea also gave the North $80 million worth of raw materials to produce textiles, shoes and soap. At the time, North Korea repaid 3 percent of the loan with $2.4 million worth of zinc ingots. Repayments of the remaining $77.6 million become due after a five-year grace period, so North Korea must start repaying $8.6 million a year every year for 10 years starting in 2014.

Seoul also loaned Pyongyang W585.2 billion (US$1=W1,172) from the Inter-Korean Cooperation Fund so it could re-connect railways and roads with the South that were severed in the 1950-53 Korean War. And it provided W149.4 billion worth of equipment to the North. The North must repay that loan in 20 years with a 10-year grace period at an annual interest of 1 percent.

It also seems unlikely that South Korea will be able to recoup W1.37 trillion plus around W900 billion in interest it provided North Korea through an abortive project by the Korean Energy Development Organization to build a light-water reactor.

The loans amount to a total of around W3.5 trillion, which the South will probably have to write off.

The Daily NK also reported on this story.

Read the full story here:
North Korea should show sincerity in repaying South Korea loans
Yonhap
2012-6-8

N.Korea Misses 1st Loan Repayment Deadline
Choson Ilbo
2012-6-8

Posted in Banking, Debt, Finance, Food, Foreign aid statistics, Foreign direct investment, International trade, South Africa, Statistics | Comments Closed

DPRK debt

Wednesday, May 8th, 2013

The Impossible State: North Korea, Past and Future, Victor Cha, 2012, p116-118.

The third bad decision took place in the 1970s. It related to foreign debt. The DPRK continued the same trends of previous decade as economic resources were diverted to the military. Despite having half the population, North Korean military spending exceeded that of the South every year from 1968 to 1979. The buildup of this decade included increasing the size of the armed forces from 485,000 to 680,000, which was twice that of the ROK. By 1980, troop number stood at 720,000 and continued to swell, with the majority deployed along the thirty-eighth parallel with their sights set on the South. Special forces grew from 15,000(1970) to 41,000(1978)The military began Scud missile development, boosted its submarine and surface flee, and the air force grew to over 200 attack plane. The army added 2,500 armed personnel carriers, about 1,000 heavy tanks, and 6,000 or so artillery tubes and rocket launchers. Military doctrine was revamped to increase the speed, power, and lethality of attacks in combat, focusing on rapid advance advance and infiltration tactics. In spite of its relatively limited technological base, by 1992 the North had twice the number of tanks and artillery that U.S-ROK defenses had in the South.

Academic Lee Hy-Sang, who has written one of the best scholarly treatment of the North Korean economy, has noted that this obsession with aggrandizing the military was driven by ideology as much as it was by external security threats. Self-reliance required the strongest military one could muster. The net effect, however, was an increasingly reckless and irresponsible approach to the economy. In order to offset the strain of the military budget on the economy, the DPRK should have directed efforts at excavating coal and other mineral resources to trade for hard currency, which mighty then have been used to finance heavy industry development, and to address energy shortages. Instead, the government decided to engage in massive borrowing from foreign markets. At the times, it seemed like the right decision. Sino-American rapprochement and U.S.-Soviet detente transformed relations between the East and West, and in this wider political context Western European countries were willing to extend credit to countries like North Korea. More important, the North began looking over its its shoulder as the 1970s saw the gradual acceleration of South Korean growth and development of major heavy industries like the Pohang Steel Complex.

So, in 1972, Pyongyang borrowed $80 million from France to build a fertilizer plant. The following year they borrowed another $160 million, from the United Kingdom to build a cement factory. In 1974, they borrowed $400 million from countries including Japan for large-scale plant equipment. In fact, between 1970 and 1975, the North borrowed approximately $1.2 billion before foreign governments realized that Pyongyang could not service the debt, These numbers do not account for whatever else might have been provided to the North from Eastern bloc countries and China.Thus, in 1976, the debt market dried up for the North as precipitously as it had opened to them six years earlier. Trapped by it own self-reliance ideology, the North could not do things normal nations would, such as issue bonds to finance its debt. Today, North Korea’s external debt is estimated $12.5 billion and no one expects them to pay it off. An attempt was made to pay back some of this in 1990 and 1991, but the DPRK has long since defaulted on its long-term debt. Pyongyang has occasionally asked Russia and former Soviet satellites like Czech Republic to forgive the majority of the debt. In response, these countries have asked for North Korea to repay part of the debt through barter. Pyongyang asked Russia in 2007 to make a “high-level political decision” to forgive $8.8 billion in unpaid debt. In August 2010, Prague asked for zinc ore as repayment for an outstanding $10 million in unpaid loans from the Cold War when it provided Kim Il-sung with machinery and equipment. Pyongyang responded that it would provide four hundred tons of “heavenly ginseng root” worth some $500,000. Since annual consumption of the root in the country was barely two tons, this would have kept Czechs well-stocked with ginseng—which, among its many reported benefits, boasts of enhancing sexual vitality—for two hundred years. As unusual secondary market has emerged for North Korean debt that a few courageous investors have dared to enter. It sells DPRK debt paper at about 6 cents on the dollar, based on the bet not that Pyongyang would ever repay but that under a future unification scenario, South Korea would want to reestablish North Korean creditworthiness as it worked to gradually reintegrate the two systems. If Seoul were to take on this debt, it could repay it all, speculators hope, with only one week’s addition to its foreign exchange reserves. Even if Seoul were to pay off only a portion of the debt, speculators could make six to seven times what they have paid for North Korean paper.

Posted in Debt, Finance, Fiscal & monetary policy, Military | 1 Comment »

DPRK owes USD $1.5b to ROK

Monday, September 19th, 2011

According to Yonhap:

North Korea owes about 1.8 trillion won (US$1.5 billion) to South Korea in food and other shipments, with its first repayment due next June, but chances of repayment are slim given the country’s crumbling economy, a government report said Monday.

The debt is for food, railway equipment and raw materials South Korea has provided to its impoverished communist neighbor in the form of loans over the past decade, according to the Unification Ministry report submitted for the annual parliamentary audit.

South Korea had been one of the largest aid providers to the North, but such shipments were halted after President Lee Myung-bak took office in early 2008 with a pledge to link aid to progress in efforts to end Pyongyang’s nuclear weapons programs.

Repayment of the loans was scheduled over 20 years with a 10-year grace period, at 1 percent annual interest. The North is scheduled to make its first repayment in June of next year for a $5.83 million food loan extended in 2000.

South Korean officials, however, have cast doubt on that repayment given the North’s dire economic situation.

The DPRK remains in debt default from loans taken in the 1960s and 1970s. The Russians are in talks to forgive DPRK debts (Likely in connection with developments of the Rason economic zone and/or natural gas pipeline).

You can learn more about speculating on the repayment of North Korean debt here.

Posted in Banking, Debt, Finance, Foreign direct investment, South Korea | Comments Closed

DPRK owes ROK appx $1billion

Wednesday, April 20th, 2011

According to the Choson Ilbo:

North Korea owes South Korea more than W1 trillion in terms of food and other loans, it emerged Tuesday (US$1=W1,092). The North has to start repaying the debt from June next year, but given its economic difficulties and strained inter-Korean relations it is unlikely that Seoul will see a penny.

According to the Unification Ministry, the Kim Dae-jung and Roh Moo-hyun administrations gave the North 2.4 million tons of rice and 200,000 tons of corn from 2000 to 2007 on condition of repayment over a period of 20 years with a 10-year grace period at a 1 percent annual interest. The loans amount to US$720.04 million, with the interest reaching $155.28 million.

The South Korean government also spent W585.2 billion from the Inter-Korean Cooperation Fund to re-link cross-border railways and roads from 2002 to 2008. Of the total, W149.4 billion worth of materials and equipment for construction on the North Korean side are also loans to be repaid on the same conditions.

Besides, Seoul lent the North $80 million worth of raw materials for production of textile, footwear, and soap in 2007 and 2008. At the time, the North paid back 3 percent of the loan with 1,005 tons of zinc ingots worth $2.4 million, leaving a $77.6 million balance.

All told, the principal on these loans amounts to W1.02 trillion and the total debt including interest to over W1.2 trillion.

The first repayment of $5.83 million for the food loans provided between October 2000 and March 2001 is due on June 7 next year.

A ministry official said, “The amount has already been included in next year’s revenue plan, on the assumption that it will be paid back. If the North fails to pay, it will be deemed outstanding balance.”

Aside from the food and economic loans, the South also lent the North W1.37 trillion through the Korean Peninsula Energy Development Organization from 1998 to 2006 for the construction of a light-water nuclear reactor. The money was raised by issuing government bonds. The total amount of all loans adds up to W2.25 trillion, if the accrued interest of W877.2 billion is counted.

But since the KEDO project was scrapped in 2006, there is no way for the South to get the money back. It seems likely that the total amount will be handled as “irredeemable government bonds” that have to be made up for with tax money.

Read the full story here:
Pyongyang Owes Seoul Huge Amounts of Money
Choson Ilbo
2011-4-20

Posted in Banking, Debt, Finance, Fiscal & monetary policy, Food, International trade, Railways, South Korea, Statistics, Trade Statistics, Transportation | Comments Closed

DPRK’s external debt

Thursday, August 19th, 2010

According to the Korea Herald:

North Korea watchers in the West estimate the North’s outstanding debts to be around $12 billion, two thirds of which is owed to former communist states.

In 2008, a ruling Grand National Party lawmaker had suggested allowing North Korea to pay back its loans from South Korea with mineral resources or development rights.

Rep. Kwon Young-se said during a parliamentary audit two years ago that North Korea’s debts amount to $18 billion, nearly as much as the country’s economic output in the year 2007.

About five percent of it, or $920 million, was borrowed from South Korea.

“Loans for North Korea’s economic development from socialist countries in the 1950s and 60s, and Western nations in the 1970s have accumulated with overdue interest on outstanding debts,” Kwon said.

“North Korea’s per capita debt is around 930,000 won, slightly less than the country’s annual per capita income of 1.07 million won.”

Last year, a top South Korean government official said Seoul could pay for tours to North Korea with commodities instead of cash.

He said the issue of paying cash to North Korea had to be reconsidered based on the U.N. Security Council Resolution 1874, which slapped tightened sanctions on the reclusive state as punishment for its nuclear and missile programs.

The crossborder tours have been suspended for the past two years after a South Korean tourist was shot to death in the North’s mountain resort.

Read the full sotry here:
North Korea cornered with snowballing debts
Korea Herald
Kim So-hyun
8/17/2010

Posted in Banking, Debt, Finance, Fiscal & monetary policy, GDP statistics, Trade Statistics | Comments Closed

DPRK asks Hungary to write off debt

Wednesday, August 18th, 2010

According to the Financial Times:

Hungary has revealed that it was asked by North Korea to write-off more than 90 per cent of its outstanding debt in the latest indication of the secretive totalitarian regime’s financial distress.

Hungary’s economy ministry told the Financial Times that North Korean negotiators had tabled the request in November 2008 during a meeting in Pyongyang.

“They asked [us] to take good consideration of the Democratic People’s Republic of Korea’s current economic difficulties and asked for cancellation of over 90 per cent of the total debt amount,” the ministry said.

The revelation follows a report in the FT last week that Pyongyang had asked the Czech Republic to write-off 95 per cent of its Kc186m ($10m) debt.

The cash-strapped totalitarian state offered to settle 5 per cent of the debt in ginseng, a root that is said to combat lethargy and impotence.

North Korea appears to be struggling to meet its financial obligations owing to the pressures of a moribund domestic economy and international trade sanctions imposed over its nuclear weapons programme.

Following the mysterious sinking of a South Korean warship in March, Washington vowed to further crack down on North Korea’s international financing, money laundering and narcotics operations.

Pyongyang’s outstanding debts are estimated at about $12bn, about two-thirds of which is owed to former communist states.

Its Hungarian debt emerged from a trade surplus between the two countries, mostly in the period before the fall of the Iron Curtain, an official said.

The total debt is 29.6m clearing roubles – an accounting unit used in the former Soviet Bloc.

Hungary said North Korea had agreed in principle to pay the debt in cash, with partial cancellation.

Details such as the clearing-rouble conversion rate and the size of the cancellation must still be settled, however.

Officials were unable to say when the negotiations would resume. Ginseng was not mentioned during previous talks.

Read the full sotry here:
Hungary reveals North Korean debt request
Financial Times
Chris Bryant
8/18/2010

Posted in Debt, Finance, Fiscal & monetary policy, Foreign aid statistics, Hungary, International trade, Statistics, Trade Statistics | 1 Comment »

DPRK trade bank sued for failure to settle debt

Monday, August 9th, 2010

UPDATE 8/9/2010: According to Yonhap:

A state-run North Korean bank has lost a lawsuit for not paying back a loan it borrowed from a Taiwanese bank nine years ago, the New York district court said Friday.

The District Court of New York confirmed it ordered the Foreign Trade Bank of Korea to pay compensations of just under US$6.77 million to the Mega International Commercial Bank (MICB) in a ruling made earlier in the week.

And as Josh notes: “By which they really mean the U.S. District Court for the Southern District of New York.”

Some additional case information may be found here.

As an aside, North Korea also recently lost another court case in the US. Read more here.

ORIGINAL POST (5/6/2010): According to KBS:

The Taiwanese bank filed its lawsuit to claim some five million dollars in interest and principal on August 25th, 2001.

It is unclear whether the North Korean bank will repay the Taiwanese plaintiff, but North Korea experts say this will at least add to the crunch on North Korean finances.

Some reference information can be found here.

According to the Korea Times:

A state-run North Korean bank is facing trial in the United States for failing to pay a $5 million loan that it borrowed from a Taiwanese bank in 2001, according to sources Wednesday.

The District Court for the Southern District of New York ordered the Foreign Trade Bank (FTB) of North Korea to make a court appearance on May 17 and submit a proposed case management plan and scheduling order.

The FTB reportedly borrowed $5 million from the Mega International Commercial Bank (MICB) in Taiwan on Aug. 25, 2001 on the promise to amortize the principal and interest in three installments by Sept. 15, 2004.

No repayment was made until December 2008, when the FTB paid the MICB $100,000 to cover some of the interest. The North Korean bank has thus far paid off a total of $462,000 to the MICB, still owing $1.78 million in interest and $4.7 million in principal.

“It has been almost unprecedented for North Korea to be sued in a commercial dispute, though there were occasions that the North was asked to stand in U.S. courts for terrorist activities,” an official of the South Korean Consulate General in New York told Yonhap News.

The official said the litigation will hamper Pyongyang’s recent move to aggressively attract foreign investment in an effort to revive its flagging economy, given that obviously doubt will arise over its debt repayment capacity.

Despite a recent currency reform, the North’s economy remains in a parlous state as the U.N. sanctions have cut off virtually all sources of foreign currency.

Seoul has also suspended tours to the North’s popular tourist destination of Mt. Geumgang, following the shooting death of a South Korean tourist in the mountain resort in July 2008. The tours were a cash cow for the North, generating more than $500 million between 1998 and 2008.

On May 1, the FTB’s official exchange rate was 96.9 won per dollar, but it was traded at 180 won in Pyongyang and higher in other areas, demonstrating the instability of the North’s economy, according to the sources.

Since established in 1959, the bank has served as the reclusive regime’s main foreign exchange bank, they said. It has branch offices in France, Australia, Kuwait, Hong Kong and Beijing.

Read the full story here:
NK trade bank sued for failure to settle debt
Korea Times
5/5/2010

Posted in Banking, Debt, Finance, Fiscal & monetary policy, Foreign Trade Bank, Lawsuits, USA | 1 Comment »

DPRK seeks to repay debt in ginseng

Wednesday, July 28th, 2010

UPDATE: This story was picked up by the Financial Times (8/11/2010):

North Korea has offered the Czech Republic 20 tonnes of ginseng in lieu of payment for some of its debts.

However, Prague has turned down the deal, instead suggesting that Pyongyang pays in the valuable mineral zinc, which can be resold on international markets.

North Korea owes the Czech Republic $10m from the days when the Czech Republic was under communist rule and the two countries traded with each other regularly. Communist Czechoslovakia was a leading supplier of trucks, trams and machinery to North Korea, creating a large pile of debt.

Pyongyang reportedly offered $500,000 worth of ginseng, a root which is reputed to boost memory, stamina and libido, as a down payment.

However, consumption of ginseng in the European country is low, with just 1.4 tonnes used each year.

North Korea’s economy is struggling as international sanctions tighten and it hopes to be able to barter its way out of handing over valuable cash.

Non-cash transactions between socialist countries is common, with Cuba sending Venezuela doctors in exchange for discounted oil.

A Czech government spokesman has said that the countries were in negotiation over how the debt would be paid.

“We have been trying to convince them to send, for instance, a shipment of zinc,” the deputy finance minister told the MF Dnes newspaper.

ORIGINAL POST: According to the Korea Times:

North Korea has offered to pay its debt to the Czech government with ginseng, according to a local Czech daily newspaper.

MF DNES, a daily newspaper based in Prague, reported last Saturday that North Korea has recently suggested to the Czech Finance Ministry that it would pay 5 percent of its debt — approximately $500,000 — with ginseng.

“We are trying to persuade them (North Korea) to give us, for example a bulk of Zinc instead, so that we could sell it to someone else,” Tomas Zidek, deputy finance minister, told the newspaper in Czech.

North Korea is believed to have a significant amount of zinc in deposits.

The paper went on to say the consumption of ginseng in the Czech Republic is very small, and it only imported 1.4 tons last year. The amount of ginseng worth $500,000 will be roughly 400 tons, securing the supply for more than 200 years.

But, to Czech’s disappointment, North Korea seemed to have made up its mind, as it sent a delegation with samples of ginseng.

North Korea is known to be Czech’s 10th biggest debtor, which goes back to the communist governments. The North bought many trams and vehicles from former Czechoslovakia.

Read the full story here:
North Korea wants to pay back debt in ginseng
Korea Times
Kim Se-jeong
7/26/2010

Posted in Czech Republic, Debt, International trade, Mining/Minerals, Pyongyang Metro, Railways, Trade Statistics, Transportation | Comments Closed

“Let’s speculate on North Korean debt!”

Thursday, March 11th, 2010

UPDATE 1 (2011-12-21): The Wall Street Journal (Dow Jones Newswire) points out movement on North Korean debt following the death of Kim Jong-il:

Saturday’s death of North Korean leader Kim Jong Il has given a lift to that country’s only openly traded securities, a batch of bonds that haven’t received a payment in almost three decades.

The defaulted bonds, which were created in 1997 when French bank BNP repackaged a series of non-performing syndicated bank loans that were granted to North Korea in the seventies, have suddenly sparked interest among speculators. The sporadically traded bonds, which trade at a deep discount to their face value, saw a tick up this week and were recently quoted at between 14 and 18 cents on the dollar, compared with 13 to 15 cents, according to London-based sales and brokerage house Exotix.

Those who have bought the bonds are making nothing less than a bet that the transfer of power to Kim’s son Kim Jong Eun will usher in a moment akin to that of the Berlin Wall’s collapse for the tightly controlled communist country.

“Investors are looking at this as an unlimited option trade with enormous potential gains,” said Andrew Chappell, head of European, African and Middle Eastern fixed income trading and sales at brokerage house Exotix in London, who says that inquiries into the bonds have increased in recent days.

According to Chappell’s calculations, investors’ claims extend to the principal and interest accrued from 1984 when the original loans defaulted. That amounts to anywhere between 300% to 600% in unpaid interest.

The premise that’s attracted hedge funds and pension funds is that North Korea can’t exist in isolation forever, and like other former communist countries will find a need to tap the international markets for funds.

That’s why the death of Kim Jong Il has opened a rare opportunity that bets on these bond could pay off. Although there’s no indication of what the structure of the government will look like under Kim Jong Eun, or of the direction it will take, some observers expect the U.S. and other western powers to use this opportunity to bring North Korea into the international fold.

By all accounts, North Korea is in very poor shape financially. A significant segment of the population is said to be dying of starvation. The country’s economy pulls in a meager $29 billion in annual gross domestic product, compared with $1.117 trillion in South Korea, according to IHS Global Insight estimates for 2011. That gaping shortfall in material well-being, the optimists reckon, will eventually drive North Korea to make good with the international community and seek foreign investment. But first it will have to clear its unpaid debts.

In fact, it was a similarly desperate need for funds that initially drove North Korea to borrow a total of 680 million Deutsche Marks and 455 million Swiss francs in syndicated loans from nearly 100 foreign banks in the late 1970s. By 1984, the country had defaulted on these loans and they were left dormant for more than a decade. But in the late 1990s, some of the banks wanted to capitalize on hopes at that time for a reunification between North Korea and South Korea, so they parceled some of the nonperforming loans into two tranches of DEM293 million and CHF217 million.

BNP, now called BNP Paribas, was the manager on the deal. It created a special purpose vehicle called NK Debt Corp., incorporated in the British Virgin Islands, to hold the loans and then sold rights to them to investors.

Over the years, even as North Korea has again distanced itself from the international community and toyed with nuclear ambitions, interest in the zero-coupon no-income bond has waxed and waned among a select few buyers interested in frontier markets or risky bets. As if passing the hot potato, fund managers have been buying and holding these bonds for a few years and then exchanging them for something else, Chappell said.

The holdings are now concentrated among a dozen or so blue-chip pension fund managers and hedge funds, he said, but declined to name them.

Franklin Templeton Emerging Market Debt Opportunities Fund, which is allowed to invest in defaulted debt, confirmed that it holds about $4.25 million in nominal value of the Deutsche mark-denominated bonds. It declined to comment further.

“These investors are not saying the bond has to pay off to make money,” said Tim Slaughter, head of fixed income at Auerbach Grayson, an agency brokerage in New York. “For them, if the price goes up from 14 cents to 16 cents it’s a good return on a $5 million investment. Investors are not necessarily looking for North Korea to reconcile with South Korea.”

But others say this speculative game is simply not worth the risk.

“The price on North Korean debt is too high in the sense there are so many alternatives in frontier debt that are actually paying coupons and redemptions that are trading at attractive levels,” said Morten Bugge, chief investment officer at Global Evolution A/S, a Denmark-based hedge fund that had held these North Korean bonds in the early years.

Read the full story here:
North Korea’s Leadership Transition Draws Brave Debt Buyers
Dow Jones Newswire
Prabha Natarajan and Erin McCarthy
2011-12-22

ORIGINAL POST (2010-3-11): According to Businessweek:

BNP Paribas SA, France’s biggest bank, in 1997 created bonds denominated in Deutsche marks and Swiss francs secured on non-performing loans owed by the Foreign Trade Bank of the Democratic People’s Republic of Korea. The notes mature today, and Exotix plans to issue new ones with about a 10-year tenor.

“There are very few investments left in the world like this,” Andrew Chappell, head of London emerging market fixed- income for Exotix, a broker specializing in distressed securities, said in a telephone interview. “The North Korean bonds are very cheap,” they may rise on signs of improved international relations and they are easier to trade than the underlying loans, he said.

President Kim Il Sung drove North Korea to become the first communist nation to default 34 years ago by spending almost a third of gross domestic product on its military. The United Nations toughened sanctions on son Kim Jong Il’s government after it detonated a second nuclear device in May, deepening an economic crisis that forced North Korea to revalue its currency in November by removing two zeros from the face value of the won.
…
“Investors have good reason to hold the notes even by extending them,” said Dong Yong Sueng, a senior fellow in the economic security team at the Samsung Economic Research Institute in Seoul. “They hope that the South Korean government may take over North Korean debts and repay them if the communist state collapses or the regime changes.”

About 320 million marks and 240 million francs ($225 million) of the zero-coupon 1997 bonds are outstanding, according to data compiled by Bloomberg. Exotix last quoted them at 12.75 percent of par value as of March 8 from 11.5 percent a month earlier and 33 percent in December 2007.

While prices that low may be attractive to investors willing to take a five- or 10-year bet, “there are just so many better opportunities for investing in high-risk assets,” Richard Segal, director of emerging markets fixed-income at Knight Libertas Ltd., said in a phone interview from London.

“I don’t see much value in the notes even at 10 or 11 percent of par because I see no willingness of North Korea to reschedule the underlying loans and no willingness of South Korea to pay them off short of unification,” he said. That’s “unlikely for a long time.”
…
North Korea is overhauling its legal system in a bid to attract as much as $400 billion in foreign investment over the next decade, almost 20 times current GDP, South Korea’s MBC television reported on March 4.

Read the full story here:
North Korea bonds due today spur exotix bet on political change
Businessweek
Jungmin Hong
2010-3-11

Posted in Banking, Debt, Finance, Fiscal & monetary policy, Foreign direct investment, France | Comments Closed

DPRK external debt approaches 100% of estimated GDP

Tuesday, October 7th, 2008

According to Yonhap:

North Korea owes a total of $18 billion to 30 different countries, including Russia and China, said Kwon Young-se of the ruling Grand National Party (GNP), citing estimates from the Unification Ministry.

The amount is almost equal to North Korea’s gross domestic product (GDP) for last year, which totaled 24.7 trillion won ($18.4 billion).

South Korea has loaned roughly 1.19 trillion won to the North, equivalent to nearly five percent of Pyongyang ‘s total foreign debt.

…

“North Korea’s foreign debt is the result of the accumulation of unpaid trade bills and loans that it received from socialist states in the 1950s and 60s and from the Western world in the 70s to develop its economy,” Kwon said.

“The volume of foreign debt is expected to continue to rise due to the interest added to unpaid debts, although that can fluctuate depending on the result of negotiations with foreign creditors,” he added. (Yonhap)

According to the CIA world factbook, however, North Korea’s total external debt was estimated at $12.5 billion in 2001. If I put aside the fact that the South Korean Ministry of Unification and the US CIA are probably reporting dollar figures using different basis years, North Korea’s external debt has increased increased nearly 47% in the last seven years. I do not think this drastic increase could be attributed to the accumulation of interest arrears dating back to the 1950s.

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