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NORTH KOREA NEWSLETTER NO. 214 (June 14, 2012)

N. Korea Does Not Mention First Repayment for Food Loans from S. Korea

SEOUL (Yonhap) -- As of June 7, the date when North Korea was scheduled to make its first repayment for food loans it received from South Korea, the socialist country did not mention the subject.

   A spokesman from the Unification Ministry in Seoul said on June 8 that South Korea had received neither a repayment nor a response to the state-run trade bank Export-Import Bank of Korea's (Eximbank) prior notification regarding the imminent due date.

   Earlier that day, Eximbank said it had called on North Korea to pay back food loans that were extended more than a decade ago and came due in early June. Eximbank notified its North Korean counterpart, the Foreign Trade Bank of (North) Korea, of its repayment obligations on May 4, but received no reply.

   The notification sent by Eximbank stipulated that the first batch of loans maturing on June 7 amount to $5.83 million, which the North's state-run Foreign Trade Bank is obligated to repay.
This amount was to be the first installment of repayments due on loans provided in the form of food aid between 2000 and 2007, such as 2.4 million tons of rice and 200,000 tons of corn, which totals $725 million.

   Under the provision of the food loan agreement reached in 2000, the loan carried a 10-year grace period. After the first due date, the North will face further redemption deadlines including $5.78 million in 2013, $19.73 million in 2014, and $19.56 million in 2015, continuing until 2037.

   The failure to repay the first installment of the loans by North Korea, which already has low financial credibility in the international community and is known as an intransigent debtor nation, was followed by concerns on its external liabilities and its abilities to repay them.
North Korea currently owes debts to the former Soviet Union, China, Japan and EU nations, among others, as it has been receiving aid in the form of loans from these countries.

   The size of the North's external debt in itself, though unclear, is not very significant compared to that of other nations. As of 2001, the North was estimated to hold $12.5 billion in total foreign debt and ranked 88th in the world, according to the online World Factbook published by the U.S. Central Intelligence Agency, last updated on April 12.

   The problem, however, is that relative to the size of the North's economy and its ability to repay its debts, the amount of external debt is substantial. According to a report by the Hyundai Research Institute, the per-capita gross domestic product for the socialist country in 2011 was estimated at $720, or about 3 percent of that of South Korea.

   The total external liability to the Western bloc and Japanese banks that North Korea incurred during the early to late-1970s is estimated to be around $2.74 billion, according to data compiled by the Economist Intelligence Unit (EIU) in 1999.

   Also according to the EIU, a significant amount of the North's total debt was borrowed from its communist allies before the fall of the Berlin Wall in 1989. Between the years of 1971 and 1989, the former Soviet Union and China lent the North a total sum of about $4.04 billion.

   The rest of the North's current liabilities are believed to be loans from other countries or backlogged interest payments that have piled up, although the amount is indefinite as the socialist regime mostly keeps the state of its external debt a secret.

   Pyongyang had already been in the limelight for deferring its loan payments during the international debt crisis of the 1980s, after it failed to pay any principle on some $770 million in syndicated loans it borrowed from European banks in the early 1970s for construction projects and grain purchases, the New York Times reported in September 1987.

   In addition to refusing to make its payments, the North demanded new loans of $200 million before walking out of negotiations during a round of talks in London, the daily said in that report, prompting Western creditor banks to formally declare the North to be in default.

   The debt situation that the North is faced with in regard to its communist allies is similar, if not worse. It is speculated that China is supplying the North with 30 percent of its food and 70 percent of its crude oil, according to an article written by Jaewoo Choo in the U.S. academic journal Asian Survey, published in April 2008.

   The specific amount, however, including both grants and loans, is not clear as both Beijing and Pyongyang refrain from any official disclosure of data. The North, regardless of the exact amount, has the responsibility to pay back the commodities it receives from China, although its ability to do so may be questionable.

   In the case of Russia, the North had debts of up to $11 billion, the Russian newspaper Izvestia reported in September 2011. Moscow decided to write off about 90 percent of the debt owed by Pyongyang in consideration of its dire economic situation, the article added.

   Additional instances have also indicated that the North is struggling under mountains of debt it cannot repay. Pyongyang had asked Hungary and the Czech Republic to write off more than 90 percent of its outstanding debt, according to a Financial Times article in August 2010.

   During a meeting in Pyongyang, the North Korean negotiators asked the economy ministry of Hungary to cancel more than 90 percent of the 29.6 million transferable rubles it owed, the article said. The transferable ruble is an accounting unit used in the former Soviet bloc.

   It was also previously revealed that the North had requested the Czech Republic for a 95 percent write-off of some $10 million debt, the Financial Times added. The socialist regime offered to pay the rest, or about $500,000, in herbal ginseng roots.

   North Korea, due to its cash-strapped economy, is seeking to repay its debt in munitions materials as well, according to the Chosun Ilbo newspaper on Jan. 19, 2012, when it reportedly negotiated with Iran the possibility of using small submarines as a substitute for repaying hundreds of millions of dollars of debt.

   Another example that demonstrates the North's financial troubles is the source of the money used recently to repay the Organization for Economic Cooperation and Development (OECD). Pyongyang has been borrowing a total of $43.15 million from the OECD for the past seven years, and the Washington-based Radio-Free Asia reported in February of this year that it has paid back only about half of that debt.

   However, some of the money used for the partial repayment came from another loan. The North used $3.64 million of the $6.26 million that had been recently loaned to it by Kuwait, a researcher at the OECD said in that radio interview.

   In regard to the North's intransigent attitude toward repaying its lenders, some of its creditor nations have reacted with a hard-line stance. When the North refused to pay back European banks in the 1970s, the creditors threatened to take legal action and seize its assets abroad, the New York Times said.

   Also in 2010, when the state-run North Korean bank failed to pay back a $5 million loan it had borrowed from the Taiwanese Mega International Commercial Bank, it was sued by the Taiwanese bank, Yonhap News Agency reported in August of that year.

   Under the initial loan agreement, the North Korean financial institution should have paid back the principle and interest by Sept. 15, 2004, but it only repaid $462,000 of the total amount in delayed interest from late 2008 through May 2009, the news agency said. The North's bank lost the lawsuit and was ordered by the District Court of New York to pay compensations of about $6.77 million as a result, the report added.

   Despite the string of examples that show the grim prospects for North Korea's financial credibility, there have been changes in how the international community perceives the socialist regime and its future economic capability.

   After the December 2011 death of former leader Kim Jong-il and the transfer of power to his son Kim Jong-un, a batch of defaulted bonds repackaged from some of the non-performing syndicated bank loans back in the 1970s sparked interest among investors.

   The value of these bonds, which haven't received any payments in almost 30 years, inched up after Kim Jong-il's death, the Wall Street Journal reported on Dec. 23, 2011, as some speculators anticipated that the new regime under the 20-something leader may bring about positive changes in the North's economy.

   No substantial changes in the direction of the North's policies have been observed yet, but North Korea watchers say Kim Jong-un's regime is likely to put more weight on the country's economic issues so as to fulfill building its long-promised "Kangsong Taeguk," meaning a great, prosperous and powerful nation.