Soft landing for household debt

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Soft landing for household debt

Interest-bearing consumer debt reached 937.1 trillion won ($861.2 billion) as of the end of December. It is an increase of 8.9 percent from the same period a year earlier. Economists forecast the number to top 1,000 trillion won by the end of the year.

Another notable figure is the fast ascent of public debt. Government debt surged 267.8 percent from 2002 to reach 367.1 trillion won at the end of last year

Interest-paying consumer, corporate and public debt amounted to 2,586 trillion won, more than double last year’s gross domestic product.

Corporate debt increases have been comparatively stable after hard lessons were learned from earlier financial crises.

The ticking time bomb is household debt. The ratio of household debt against disposable income hit 144 percent in 2009, 20 percentage points higher than the level for U.S households.

Nearly 30 percent of the country’s households have debt greater than their total financial assets - meaning three of every 10 families are living beyond their means.

But politicians running on populist platforms ahead of upcoming elections are only fueling the debt crisis.

Disproportionate household debt levels can lead to a financial meltdown and economic catastrophe. When public debt levels exceed safe limits, the government has few options to turn to if the economy is hit by a sudden calamity.

We have seen many economies crumble under the weight of excessive debt. The highest priority for our economic stewards is no doubt to address the worrisome household and government debt levels.

Authorities should guide the economy to a smooth landing by containing rising household debt against cashable income. The central bank could consider radical hikes in the benchmark interest rate if necessary.

The debt-to-income criteria for authorizing new loans should also take into consideration financial-market security, which is a more urgent task now than vitalizing the real estate market.

Greater awareness among consumers and the government against debt-financed profligacy is imperative.

After that, authorities should come up with support measures such as shifting the floating interest rates to a fixed one to ease the interest burden on consumers.
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