North Korea's intercontinental ballistic missile (ICBM), Hwasong-14, is lauched at an undisclosed place, July 29. / AFP-Yonhap

By Kim Jae-kyoung

SINGAPORE ― The rapid development of North Korea's missile and nuclear capabilities is disrupting the strategic balance on the Korean Peninsula and raising the risk of a military conflict, global credit ratings agencies warned, Sunday.

They said if tension builds up further, it will cause serious damage to South Korea's financial markets and economy.

"The way we generally view the tension on the Korean Peninsula is that it wouldn't be rational for either North or South Korea to start an outright war," Thomas Rookmaaker, director of Sovereigns and Supranationals Group at Fitch Ratings, told The Korea Times.

"However, the strategic balance is changing. North Korea continues to strengthen the ability of its weapons to reach U.S. territory and there is a risk that confrontation could be triggered by an unexpected event or a judgment error on either side."

He expressed concern that war would highly likely imply the end of the North's regime and massive destruction in the South.

"While the tension buildup has shown a cyclical pattern for years, the current tension level is higher than we have seen in the past few years and uncertainty has increased, with the potential for spillover in international relations," he said.

His warning comes as tension has significantly built up recently with the North Korean regime making progress in the development of its nuclear weapons, and escalating rhetoric on both sides.

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Last week, U.S. media reported that the North has successfully completed the production of a nuclear warhead that's small enough to fit on its missiles.

The report came several days after Pyongyang successfully conducted its second test of an intercontinental ballistic missile (ICBM), July 28, that it claimed is capable of reaching the U.S. mainland.

Moody's Investors Service also voiced concern that the risk of a war on the Korean Peninsula is rising.

Following the North's ICBM tests, Moody's changed its assessment of Korea's susceptibility to event risk to "Moderate (+)" from "Moderate (-)," which reflects the increase in a regional geopolitical event risk related to a potential military confrontation with North Korea.

"The change in the susceptibility to event risk driven by our re-assessment of geopolitical risk implies that while we think the probability of outright military conflict remains low, it has risen from very low levels in our view," said Steffen Dyck, Moody's vice president and senior credit officer.

He pointed out that a further sustained escalation in tension would dent Korea's economic and fiscal strength.

"A military confrontation would have significant negative credit implications. In particular, depending on its nature and duration, it could severely impact the economy, the functioning of the government and the country's payment system," he said.

"Slower growth in investment and consumption would constrain overall growth and could prompt larger fiscal stimulus measures."

In its credit report released a week ago, the U.S.-headquartered agency said that in addition to conflict risk, a geopolitical event risk also lies in the potential for a regime collapse in North Korea.

"Depending on how it would unfold, such an event could lead to acute financial strains for South Korea's government for an extended period, while potential economic benefits would likely take time to materialize," it said.