Tensions on Korean Peninsula Add to Global Economic Concerns

Korea protest
Korea protest

Already skittish about Europe's escalating debt crisis, investors had yet another international development to worry about this week. Escalating tensions and war-like rhetoric emanating from the Korean peninsula helped send world stock markets tumbling on Tuesday.

Reports that North Korea was launching combat preparations and cutting off ties with South Korea were the latest news driving a wave of anxiety for investors. The move comes after South Korea -- outraged after the sinking of a naval vessel that killed 46 sailors and was traced to a North Korean torpedo -- vowed to take punitive measures, including halting some trade.

While saber rattling out of the totalitarian regime is hardly new, geopolitical experts were struck by the brazenness of North Korea's aggression.

"If they want to get money out of people, there are lots of things they could have done," said Ian Bremmer, president of consulting firm The Eurasia Group said in an interview with DailyFinance on Monday. "This is well beyond that in terms of escalation."

A botched currency reform that resulted in the execution of the North Korean finance minister may be forcing the authoritarian government to channel anger externally, Bremmer said.

"It is clear they are looking to escalate and find an enemy from outside in a very serous way because of the level of instability they are presently dealing with," Bremmer said. "That makes this a very dangerous confrontation."

Euro Worries Persist

Shell-shocked investors have been obsessed with the familiar, debt-driven risks coming out of Europe. And those fears were ignited again on Tuesday after the consolidation of four small Spanish banks led to mounting worries about the region's banking sector.

But while investors are quick to recall the carnage unleashed by the bankruptcy of Lehman Brothers two years ago, major and systemically important Spanish banks seem safer for the time being, some analysts have noted.

On the other hand, the risks posed by the brutal, enigmatic North Korean regime may be getting overlooked because the country is hard for investors to categorize quickly, Zachary Karabell, an author, money manager and president of RiverTwice Research, told DailyFinance in an interview Monday.

"There is a disconnect between perceptions of risk in any long-term, systemic way in the European Union, not to say working out the euro isn't something the Europeans have to do," Karabell said. "Korea is where a lot of concern about proliferation and stability should have been."

Bremmer pointed out that the devolving instability in Thailand had similarly hit a tipping point after flying under the radar for 18 months. Confrontation between the two Koreas also has the potential to spiral out of control. "Is this a game changer?" Bremmer said. "I suspect it might be."

Even as signs of an economic slowdown emerge domestically, then, investors have yet another region to keep them awake at night.