Thursday, December 22, 2011

Financial bets on North Korea

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 1970s, 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 14 to 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 Mr. 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. ...

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

The premise that has attracted hedge funds and pension funds is that North Korea can't exist in isolation forever, and, like other former communist countries, will need to tap the international markets for funds.
--Prabha Natarjan and Erin McCarthy, WSJ, on Arrow-Debreu securities on North Korea's reintegration into the global financial market