Bangkok--17 Jul--Standard & Poor's Standard & Poor's considers recent news of North Korea's shutdown of its nuclear reactor encouraging. But this move alone is not enough to change the landscape of geopolitical risk on the Korean peninsula or alter our current sovereign credit ratings on the Republic of Korea (South Korea; foreign currency ratings A/Stable/A-1). A media report has stated that the government of the Democratic People's Republic of Korea (North Korea) confirmed the shutdown of its nuclear reactor in Yongbyon--a move that was monitored by personnel of the International Atomic Energy Agency on July 14, 2007. In general, this is a positive step forward for North Korea to fulfill its February 2007 agreement with the members of the Six Party Talks on its nuclear disarmament. At least in the near future, the reported action will help reduce geopolitical risks associated with the Korean peninsula. But these developments will not significantly affect our view of the sovereign ratings on South Korea for the following reasons. Firstly, further steps remain to achieve the nuclear disarmament of North Korea. The next step according to the February agreement is for North Korea to disable all its existing nuclear facilities. But on this point the U.S. and North Korea could have different interpretations of the exact meaning of "disable", which is not as clear as "dismantle". In addition, although the North Korean government has reportedly committed to declaring all its nuclear programs, it is difficult to know whether this disclosure is truly comprehensive or not. Besides, the February agreement did not cover the treatment of all of North Korea's existing nuclear capabilities or the enriched plutonium that North Korea is said to possess, which could potentially produce around four to eight nuclear warheads. Even if the future enrichment of plutonium can be avoided, there remains the risk of nuclear brinkmanship on the part of North Korea. Secondly, there is still a question mark over whether the North Korean government really intends to completely give up its nuclear capability. If we assume the single most important policy objective of North Korea's regime is its own survival, it is difficult to imagine the leader(s) of North Korea would give up their nuclear capabilities entirely in exchange for economic benefits. Furthermore, North Korea's behavior is difficult to predict--as its past record of failing to meet agreements demonstrates. In this sense, there is still a risk regarding the nuclear disarmament of North Korea. Thirdly, although we cannot fully disregard the possibility of armed conflict on the Korean peninsula, our baseline scenario (not limited to the nuclear issue) remains a peaceful solution. However, we believe that any such peace could be protracted and inconclusive. The possibility also remains for the two Koreas to be reunified. The financial cost of such reunification remains a contingent risk to South Korea's fiscal position and outstanding debt. Until there is a significant development or material fact that would change the above assumptions, our consideration of the potential risk on South Korea's fiscal position will not change either. We will continue to closely monitor future developments and keep investors posted whenever there is a significant development on the issue of North Korea's nuclear disarmament. At the same time, we would asses the impact of any potential developments on the sovereign credit ratings on South Korea. Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Media Contact: David Wargin, New York (1) 212-438-1579 [email protected] Analyst Contact: Takahira Ogawa, Singapore (65) 6239-6342