SCENARIOS: How far will North Korea raise tensions?
SEOUL (Reuters) - North Korea has put a long-range missile in place for a launch that Washington warned would violate U.N. sanctions already imposed on the reclusive state for past weapons tests.
Analysts do not expect a major conflict between the divided Koreas but say recent North Korean saber-rattling has been aimed at pressuring Seoul to drop its hard-line policy and grabbing the attention of new President Barack Obama.
News reports said U.S. and Japanese forces may try to shoot down the rocket, which is planned for launch in an April 4-8 window, but analysts say that is unlikely due to technical and political challenges.
The following are scenarios that could unfold amid the heightened tension, and analysts' views on their likely financial market impact.
A NAVAL SKIRMISH
The North has threatened a military strike over a disputed Yellow Sea border off the west coast. It triggered clashes in 1999 and 2002 that killed sailors on both sides.
The North may be hesitant to spark another battle after its navy was outgunned by a superior South Korean force in 2002.
North Korea has added more short-range missiles along the coast and it could raise tension by firing missiles into waters claimed by the South or at one of its ships.
A missile or artillery strike would rattle South Korea's stock market and drive the Korean won down, but the impact would probably be short-lived. South Korea's sovereign rating remained unchanged through the two previous naval fights.
A shoot-out along the Demilitarized Zone border could easily ignite a broader gunfight involving many of the more than a million troops who are deployed on both sides of the buffer zone that has divided the peninsula since the 1950-53 Korean War.
But a land battle is unlikely because of the chance it could trigger a bigger conflict. A more likely scenario is for the North to conduct massive military training maneuvers or send aircraft just close enough to the border to rattle the South.
Still, South Korea's defense minister has told parliament the "limited" attack by the North could come from land, sea or air while attention is being diverted to the planned missile test.
The South would strike back at the base where the attack is launched, Minister Lee Sang-hee said earlier in March.
Seoul's stock market and the won would move sharply lower in reaction to a confrontation between forces of the North and South, more so than a test of the North's missile or nuclear device.
An intrusion by North Korean forces or an artillery strike that hits South Korean territory could trigger a massive pullout of foreign investment from the markets and result in a sharply higher yield on treasury bonds.
BALLISTIC MISSILE TEST
There is a small chance that North Korea may also test launch its medium-range ballistic missiles, as it did in July 2006 when it fired off the Taepodong-2 for the first and only time. Such a move would undermine the North's argument that the planned rocket launch is for peaceful purposes and strengthen the case of those seeking punishments.
SECOND NUCLEAR TEST
North Korea, which conducted its first and only nuclear test in October 2006, knows another test would bring it further isolation and deplete its already meager stock of weapons-grade plutonium. At this point, another test would not bring the North enough political gain while carrying the risk of straining ties with its biggest benefactor, China.
Also, the North's leaders could find their hand strengthened at home by a successful rocket launch, which would serve as a symbol of their pledge to build "a powerful nation" and would not need to conduct a second nuclear test.
But proliferation experts said a second test would eventually come because the first test appeared to be only partially successful and the North needs another one to see if it has improved its bomb design.
In order to increase its leverage with the new U.S. administration, the North may well be considering moves to restore operations at its Soviet-era Yongbyon nuclear plant and reverse disablement steps called for in an international deal that were designed, in total, to put the facility out of business for at least a year.
Experts say the North could have the facilities up and running again in a few months. There are discharged, irradiated fuel rods cooling that the North could use to produce what experts say would be enough plutonium for one more nuclear bomb.
U.S. military commanders in South Korea have said U.S. and South Korean forces would be able to quickly defeat the North, even though the North would still be able to quickly fire off thousands of artillery shells as well as launch missiles that could hit South Korea and Japan.
Analysts say an all-out war would bring the end of Kim Jong-il's government, cause enormous destruction on the peninsula, and perhaps Japan. It could trigger a new economic and financial crisis for the region, which has already been sucked into the global economic downturn.
(Additional reporting by Kim Junghyun; Editing by Jon Herskovitz and John Chalmers)
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