Following is the third in a series of stories featuring economic issues facing the Park Geun-hye government which was inaugurated on Feb. 25. ― Ed.
South Korea saw its ratio of household debt to gross domestic product exceed the average held by the Organization for Economic Cooperation and Development member countries last year.
The nation’s household debt-to-GDP ratio reached 81 percent, exceeding the 73 percent OECD average, according to the Korea Chamber of Commerce and Industry.
Considering President Park Geun-hye’s commitment to lifting ordinary peoples’ financial status, she is expected to set herself apart from the former Lee Myung-bak administration, which has been criticized for passing down a ticking bomb before it explodes.
Former President Lee failed to take no concrete action to resolve the snowballing consumer debt problem.
Park’s aides have affirmed that the new government would start to grapple with snowballing household debt upon her inauguration, which could be an indication of how seriously she takes the problem.
As pledged, the Park administration is expected to set up a fund worth some 18 trillion won ($16.6 billion), a kind of “bad bank” to take over overdue loans and other bad loans owed by credit delinquents.
Such a move is designed to ease debt obligations through low-interest repayment rates in the long term, while upgrading their credit, as part of efforts by Park to boost the livelihood of the low and mid-income brackets.
There are more than 3 million credit delinquents in the country, according to Park’s economic policy paper.
This plan also calls for rejuvenating those relying on state funds for basic living by reducing their debt by 70 percent, and 50 percent for other debtors through personal workout programs.
Taxpayers, however, may raise legitimate questions about rewarding those who have failed to meet their debt obligations.
Pundits say that one of the first tasks for the Park administration will be to build a consensus on helping hard-pressed household debtors.
The government also has the herculean task of keeping moral hazard to a minimum when devising a way to subsidize debt reductions ― an unenviable task that will be put on the shoulders of Park and her senior economic policymakers.
Korea saw household debt reach an all-time high of more than 950 trillion won, which could possibly be linked to massive increase of credit delinquents.
Global credit rating firms such as Moody’s Investors Service have warned that household debt defaults could potentially create shocks in the financial market, equivalent to Korea’s 2003 credit card fiasco and the 2008 global financial crisis.
“We continue to view Korea’s high household debt as credit negative,” a Moody’s report said.
“While we do not anticipate a trigger in the next 12 to 18 months that would pressure the banks’ asset quality, Korea’s household debt levels will pose significant tail risks for the financial system,” it said.
Korean banks have sufficient capital base to withstand possible household default, while the annual increase of debt has been modest.
However, data show some worrisome signs as Korea has the fourth-largest household debt compared to its gross domestic product among OECD members in 2011, following Ireland, Australia and the U.S.
The Korea Center for International Finance has said the banking sector had gradually been recovering profitability and quality of assets since the global financial crisis. But according to the center, the growth in household debt could serve as a risk factor.
The institution pointed to households’ growing burden from higher interest rates on mortgages.
It also said about 30 to 40 percent of mortgages were taken out for the purpose of investment or consumption rather than actual house purchases.
The nation’s financial regulators, including the Financial Supervisory Service, have been instructing commercial banks to reduce their lending rates by setting guidelines and are to urge banks to stop evaluating branches based on their household lending.
Some economists say that a key issue is whether the nation would see a soft landing in resolving household debt woes.
“The household debt issue is certainly problematic. But it is undesirable for the authorities to lead more borrowers to secondary financial companies,” a report from Hyundai Economic Research Institute said.
By Kim Yon-se (email@example.com