Controlling household debt

People are withdrawing money from installment savings accounts and breaking insurance contracts before they have matured. These are ominous signs.

Woori Bank saw early withdrawals from installment savings accounts shoot up as much as 65 percent in October from the same month last year. Monthly cancellations at Shinhan Bank also increased to 50,000 accounts in October from 40,000 a year earlier. The number of insurance contracts being cancelled due to delayed payment of insurance fees also surged.

Consumers usually break contracts as a last resort to come up with quick cash. This phenomenon may be an ominous harbinger to a crisis in the household debt situation.

Loan default rates are quickly on the rise. Hana Bank reported its default rate shooting up to 0.45 percent in the third quarter, compared with 0.29 percent in the fourth quarter of last year.

We should not assume that a household debt crisis will suddenly emerge at any moment. The government insists household debt levels are still controllable, and loans are mostly held by middle- or high-income customers who can afford to repay them. Most debt has been issued to finance mortgages.

But the problem is that next year’s economy is expected to be worse than this year’s. If income falls, the debt burden could increase and people may be less able to repay their loans.

Consumers are under growing debt pressure. Household debt is expected to increase by 60 trillion won ($53 billion) from last year and exceed 900 trillion won by the end of the year.

Due to higher interest rates, interest payments alone could top 50 trillion won for the first time ever to reach 56 trillion won.

If incomes fall next year, many will not be able to afford their interest payments. The debt problem that so far has been restricted to low-income people could spread to higher income brackets, amounting to a major economic crisis.

The U.S. financial crisis in 2008 was triggered by low-income customers defaulting on their loans. Authorities and the financial industry must do something now while there is still time to avert a similar crisis in Korea.

The insolvency of savings banks should be cleaned up first. Debt issued by credit card and securities companies should be dealt with next. And families should evaluate their debt situations. Otherwise, next year could be tough for everyone.